Kraft Heinz won’t cut payouts, but its debt is downgraded
Fitch, S&P drop food giant’s ratings
Investors braced last week for unwelcome news that the Kraft Heinz Co. would cut the dividend that it pays to shareholders.
Instead, the food giant whose grocery basket holds brands such as Oscar Mayer, Velveeta, Smart Ones and Ore-Ida on Thursday held firm on the 40-cent-per-share quarterly payout — a vote showing the board’s “confidence in the turnaround plan being led by CEO Miguel Patricio and the team he has now put in place,” according to the official announcement. Then the other shoe dropped. Kraft Heinz on Friday saw not one but two ratings agencies downgrade the company’s debt — meaning it had lost its coveted investment grade status. Both Fitch Ratings and S&P Global Ratings trimmed their assessments.
As of Dec. 28, the company’s total debt outstanding was $29.2 billion, the Fitch report noted.
Fitch shifted its rating on Kraft Heinz long-term debt from BBBto BB+ — a level generally referred to as “junk bond status” because the risk of not being paid off is higher. Borrowers with lower ratings generally have to pay more to borrow.
The dividend was apparently a factor in the downgrade.
“Kraft announced its decision to maintain the annual dividend of $1.60 per share, which translates into $2 billion in total annually, removing this as a near term deleveraging option,” the Fitch report noted.
S&P Global had a similar view: “U.S.-based Kraft Heinz Co’s financial policy has become more aggressive given its unwillingness to cut its high payout dividend at a time that leverage is elevated because of underperformance,” its report reads in part.
In other words, the company hasn’t exactly been posting great financial results. A dramatic $15.4 billion write-down of the value of some of its brands last year was followed by better numbers in its most recent fiscal year, but company officials still talked more last week about stabilization in 2020 than any massive gains on the horizon.
Kraft Heinz has been pressured by weak sales growth, labor and community inflation, and investments in improving its service to customers, among other things, the Fitch report noted.
In a conference call with analysts Thursday, Chief Financial Officer Paulo Basilio seem to signal that the ratings agencies would be concerned.
“After meeting our obligations and investing in the business, maintaining a strong dividend to shareholders is a priority of the company, especially during this important period of this transformation,” he said.
“Investment grade status also remains important to us, but we understand that the decline in our leverage may not come as rapidly as desired.”
Kraft Heinz, formed by the 2015 merger of Pittsburgh’s H.J. Heinz Co. and Illinois-based Kraft Foods Group, had managed to avoid such downgrades in the past, even as a joint venture formed by Warren Buffett’s Berkshire Hathaway and the private equity group 3G Capital used debt to acquire and merge iconic companies.
Fitch’s report raised concerns that the food company, still officially co-headquartered in Pittsburgh and Chicago, will need to divest assets — something that Mr. Basilio indicated was an option if done with care and not at fire sale prices.
S&P’s report indicated an upgrade is unlikely over the next 12 months but could come if performance improves: “We would also need to believe that financial policy will not become more aggressive, especially considering the company’s historical appetite for large acquisitions.”