If you like high-yield investing, you probably have both british american tobacco plc(NYSE: BTI) and Kraft Heinz(NASDAQ:KHC) Pops up on your inventory screen. There are things to like and dislike about each, and one major distinction should lead investors to make a clear choice between them.
Here's what you need to know and why low-yielding stocks may be a better choice for most investors.
If you're only concerned about dividends, your best bet is British American Tobacco. This starts with production. British American Tobacco offers investors a dividend yield of 8.4%. Kraft Heinz's dividend yield is much lower, at just 5.5%. Of course, this proportion is relatively high in comparison S&P 500 Index The index's yield is just 1.2%, while the average yield for consumer staples stocks is 2.8%, but in absolute terms it's clearly far less attractive than 8.4%.
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Kraft Heinz and British American Tobacco's dividend records also differ widely. Kraft Heinz cut its 2019 quarterly dividend from $0.625 per share to $0.40 per share and has not increased the payout since. British American Tobacco's quarterly dividends in the UK company's national currency have been on a steady upward trend since it began paying them in 2018.
If you only care about dividends, the obvious choice is British American Tobacco. But dividends alone don't tell the full story.
The high dividend yields offered by these two consumer staples companies exist because they are each dealing with business issues. This is something most investors should pay attention to if they intend to hold these stocks for the long term.
Kraft Heinz was formed from the merger of The Kraft Company and The Heinz Company. The food maker's initial goal was to cut costs to boost profits. This was not a good long-term approach to business and a new direction was soon needed.
Now, after a management overhaul, the company is focusing on growing its most important brands and trying to sell brands that don't mean much to top and bottom lines. This approach has worked well for many other companies, but Kraft Heinz is currently slow to make progress. In fact, brands the company has been following have performed worse than brands it hasn't been following.
Not shockingly, the stock has been in a panic and has a high yield. But given the success of competitors Procter & Gamble and Unilever If it takes the same approach, Kraft Heinz seems likely to get through this tough period given enough time.
British American Tobacco's problems are more serious. The company's main product is cigarettes. The company's cigarette sales have been declining for years. For example, in 2018 the company produced approximately 700 billion cigarettes. By 2023, this number will drop to 555 billion. While full-year 2024 figures are yet to be released, the numbers are likely to fall again given continued weak sales in the first half.
British American Tobacco offset continued volume declines with continued price increases. But this can only continue for a while until rising prices exacerbate falling sales.
In fact, British American Tobacco has even changed the way it accounts for its U.S. cigarette brands. Although a bit cryptic, it basically holds that these brands will be worthless in about 30 years. While the stock is up more than 15% in the past year, that doesn't bode well for the future and hints at deep underlying problems facing the company.
The ugly truth is that from a business perspective, both BAT and Kraft Heinz are doing poorly today. Conservative dividend investors may want to approach both companies with caution.
But if you're choosing between them, Kraft Heinz seems to be the better chance. After all, no one needs to smoke, but everyone needs to eat. Given the strong brands Kraft Heinz controls, it seems more likely to get back on track than BAT, whose most important brands are likely to become obsolete.
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Reuben Gregg Brewer works at Procter & Gamble and Unilever. The Motley Fool recommends British American Tobacco, Kraft Heinz and Unilever, and recommends the following options: long the January 2026 BAT $40 call and short the January 2026 BAT $40 put. The Motley Fool has a disclosure policy.
The Best Stocks to Buy Right Now: British American Tobacco vs. Kraft Heinz Originally published by The Motley Fool
