Every business eventually goes through a difficult period; This is how business works. Difficult times, on the other hand, can provide long-term investors with good buying opportunities. However, you need to exercise caution so you don't end up buying a company that looks like it might go the buggy whip route. A comparison between Altria(NYSE:MO) And Kraft Heinz(NASDAQ:KHC) This will help explain the tightrope that turnaround investors must walk.
Altria is one of the largest tobacco companies in the world. It mainly sells cigarettes and focuses on the US market (it has split its overseas operations into Philip Morris International(NYSE:PM) several years ago). Given the addictive nature of tobacco, Altria's customers tend to be very loyal. And it owns the Marlboro brand, which has a whopping market share of around 42% in the United States. In total, Altria's market share amounts to almost 46%. It is a giant in the cigarette sector.
Start your mornings smarter! Wake up with Breakfast News in your mailbox every market day. Register for free »
Image source: Getty Images.
Kraft Heinz is one of the largest packaged food companies in the world. It was born from the merger of Kraft and Heinz, two of the most famous names in the food industry. Although it doesn't have a single dominant brand like Altria, you're probably familiar with many of the company's products, including the obvious ones, like Kraft and Heinz, but also Philadelphia Cream Cheese, Lunchables, Kool-Aid, and Jell -O, among others. many others. The company's comprehensive brands, distribution system and marketing capabilities make it a valuable partner for retailers around the world.
While Altria and Kraft Heinz are both facing business challenges, the issue Altria is facing is particularly concerning. Demand for cigarettes has been declining for years in the United States due to a societal shift away from smoking, with the habit clearly identified as a health risk. To give some numbers, Altria sold 10.6% fewer cigarettes in the first nine months of 2024 than in the same period of 2023. In 2023, it sold 9.9% fewer cigarettes than in the same period of 2023. 'in 2022. The downward trend continued. for years.
Altria was able to raise prices to offset ongoing declines, allowing it to support its massive 7% dividend yield. This fact has maintained investor interest in the stock, but it only masks the big problem: Altria's core business (tobacco products, which account for nearly 90% of revenue) appears to be experiencing a secular decline.
The problem facing Kraft Heinz is a little different. The two companies merged with the idea of generating value by reducing costs. This didn't work as well as hoped because it's very difficult for a company to find its way to growth. The company is now working on a different plan, which includes eliminating lagging products while focusing more on the most important ones. This is the same approach that has been used successfully by a number of other consumer staples companies in recent years, including Procter & Gamble(NYSE:PG).
That's no guarantee it will work for Kraft Heinz, which notes that the company has shown weak results in areas where it is supposed to focus its efforts. This weak execution, however, explains why its dividend yield is 5% today, compared to around 2.6% for the average consumer staples company. Given the company's brands, size and distribution system, it appears that it will likely navigate the transition it is working on, even if it is fraught with challenges.
Here's the question: Is about 2 percentage points of return worth the risk of owning a company facing a secular decline in its most important business? This would be exactly the decision you would make if you bought Altria over Kraft Heinz. Buying Kraft Heinz would mean buying a diversified food maker working to turn around a set of iconic brands using the same approach that has worked successfully for other consumer staples companies. And with the yield hitting 5%, it's not like you're not being paid very well while you wait for Kraft Heinz to navigate this business transition.
But remember there is a key difference: food is not in long-term decline. On the contrary, food demand is likely to grow with the world's population. Thus, Kraft Heinz's business rests on fundamentally stronger foundations than Altria's. From a risk/reward perspective, Kraft Heinz's lower yield appears to be the better choice for most investors.
Have you ever felt like you missed the boat by buying the best performing stocks? Then you will want to hear this.
On rare occasions, our team of expert analysts issues a “Doubled” actions recommendation for businesses that they believe are on the verge of collapse. If you're worried that you've already missed your chance to invest, now is the best time to buy before it's too late. And the numbers speak for themselves:
Nvidia:If you invested $1,000 when we doubled down in 2009,you would have $376,324!*
Apple: If you invested $1,000 when we doubled down in 2008, you would have $46,022!*
Netflix: If you invested $1,000 when we doubled down in 2004, you would have $491,327!*
Right now, we're issuing “Double Down” alerts for three incredible companies, and there may not be another chance like this anytime soon.
Ruben Gregg Brewer holds positions at Procter & Gamble. The Motley Fool recommends Kraft Heinz and Philip Morris International. The Mad Motley has a disclosure policy.
