Warren Buffett is known as the Oracle of Omaha because of how successfully he has managed his investment vehicle, Berkshire Hathaway (BRK.A 0.18%) (BRK.B 0.09%), over the years. But Buffett is very open that even he doesn’t have perfect clarity when it comes to the future of stock prices. And he willingly tells investors when he’s made a mistake, which is how he has described his purchase of consumer staples giant Kraft Heinz (KHC -1.46%).
Here’s what happened and why you might want to avoid Buffett’s mistake by buying this other deeply out-of-favor, high-yield, consumer staples Dividend King today.
What was Buffett’s mistake?
A material part of Warren Buffett’s investment training came from Benjamin Graham. Some people call Graham the father of fundamental analysis, and some people consider him one of the most famous value investors of all time. Regardless of which view you take, he had an interesting point of view on investing. To paraphrase one of his most important maxims, even a good company can be a bad investment if you pay too much for it.
Image source: The Motley Fool.
This is where Warren Buffett’s mistake lies with food maker Kraft Heinz. The company has a strong collection of brands and a long history of managing its brand portfolio to keep up with consumer buying habits. But even good companies go through difficult periods. When Buffett bought into Kraft Heinz it was basically in a transition period. In fact, part of the goal of Kraft and Heinz merging was to cut costs by reducing corporate bloat.
This is a fine goal, but cutting costs is not a long-term business plan, and management took their eyes off the ball. That resulted in a massive write-down in the value of some of Kraft Heinz’s brands, which Buffett basically admitted was an indication that he overpaid for the consumer staples company.
Take a look at this down-and-out competitor today
The truth is that Kraft Heinz will likely muddle through to better days, but its turnaround effort is still ongoing. Most investors should probably stay away. But PepsiCo (PEP -0.78%), which is down around 30% from its highs in 2023, is a totally different story. This Dividend King stock looks cheap right now.
For starters, PepsiCo’s 4% dividend yield is near the highest levels in the company’s history. That should attract dividend investors and those looking for a stock that’s on sale. The value proposition, meanwhile, is backed by the stock’s price-to-sales, price-to-earnings, and price-to-book value ratios all being below their five-year averages.
As for the business, PepsiCo remains one of the largest beverage companies on the planet (Pepsi), is the largest salty snack food maker (Frito-Lay), and has a strong position in packaged foods (Quaker Oats). It is one of the most diversified food companies you can buy. And while recent financial performance has been weak, PepsiCo’s size and business strengths (it is a marketing, R&D, and distribution powerhouse) will likely help it turn things around in time.
After all, you don’t get to Dividend King status by accident. It requires a strong business model that gets executed well in good times and bad. For example, a key part of PepsiCo’s success comes from acquiring up-and-coming brands. It recently bought Siete, a Mexican American food company, and has plans to buy Poppi, a prebiotic beverage maker. Both are on trend and should help set the foundation for future growth. So, unlike Kraft Heinz, which charted a different course and then lost its way, PepsiCo looks like it is still following its North Star despite currently choppy seas.
Invest for the long term like Buffett does
While you want to avoid overpaying for any stock, there is one important Buffett approach that you will want to follow if you buy PepsiCo. That’s investing for the long term. PepsiCo has some work to do to get its business back on track, and it could take a little while to turn things around. However, the stock looks cheap and the lofty yield will reward you well for sticking around while you wait for better days.
Reuben Gregg Brewer has positions in PepsiCo. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool recommends Kraft Heinz. The Motley Fool has a disclosure policy.
