If you’ve ever been to a grocery store or convenience store, you know the brands that PepsiCo (PEP -0.82%) and Kraft Heinz (KHC -1.13%) sell. They are icons in the food and beverage niche of the consumer staples sector. But while they both have very attractive dividend yields right now, income investors will probably be better off focusing on the only company in this duo that is a Dividend King. Here’s why.
PepsiCo has an impressive streak
PepsiCo’s dividend has been increased annually for 52 consecutive years. That puts it into the highly elite group of companies that are known as Dividend Kings. Achieving this status doesn’t happen by accident — it requires a strong business model that is executed well in both good times and bad times. If you are an income investor, PepsiCo should be of particular interest to you.
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That said, PepsiCo’s dividend yield is “only” 3.6%. Kraft Heinz’s yield is 5.4%. Despite the fact that PepsiCo’s yield is near the highest levels in the company’s history, yield-focused investors might still be more attracted to Kraft Heinz. But there’s a little nuance that can’t be ignored. Kraft Heinz’s dividend has been stuck at $0.40 per share per quarter since it was cut at the start of 2019.
This is where the difference between PepsiCo and Kraft Heinz really starts to take shape.
What is going wrong at PepsiCo and Kraft Heinz?
Every company eventually faces a difficult period. If a company is around long enough, it will face many difficult periods. PepsiCo is suffering through a business slowdown today. Add in broader industry concerns about new weight loss drugs and what appears to be a shift toward increased health consciousness (among individuals and regulators), and investors are punishing the soda, snack, and packaged food giant.
Still, 2024 organic sales were up 2%, and core earnings per share advanced 9%, so it isn’t like PepsiCo’s business has fallen off a cliff.
That said, the company’s outlook for 2025 was a bit subdued, with management guiding toward similar organic sales growth and earnings rates. Investors had come to expect more, given the strong performance PepsiCo exhibited coming out of the coronavirus pandemic. That enthusiasm was probably a bit overheated, since inflation was the primary driver of the price increases PepsiCo was able to push through its system. Slow and steady growth is really the norm for the company, and it’s why long-term dividend investors will probably want to consider the stock today, given its historically high yield.
But why not go with higher-yielding Kraft Heinz? The lack of dividend growth is one big reason, but it’s the reason for the stagnant dividend that really matters.
Kraft Heinz was created via the merger of food giants Kraft and Heinz, with the original goal of cutting costs to boost profits. That’s a fine short-term plan, but not a good long-term plan. It quickly became apparent that this food giant needed to do something more. The new approach is to focus on the company’s most important brands, which is a good idea.
However, the brands on which it has been most focused have not been performing particularly well. Organic sales fell 4.5% among the “accelerate” brands, as they are called, in the third quarter of 2024, and then dropped another 5.2% in the fourth quarter. In other words, there’s more work to be done before this company gets back on track.
A fallen angel versus a turnaround play
When you step back and look at PepsiCo and Kraft Heinz, you see two companies that are out of favor on Wall Street. Only PepsiCo looks like it is dealing with a short-term issue that it will likely weather in stride, as it has similar situations in the past. In fact, the business still appears to be growing — just not as fast as it was a couple of years ago.
Long-term dividend investors will probably find this Dividend King’s story a lot more attractive than the slow-moving turnaround that Kraft Heinz is still working on. Will Kraft Heinz pull the turnaround off? Probably. But it seems likely that the dividend will be stuck in neutral for longer and that investors will have to suffer through difficult earnings reports for longer.
