Is Kraft's 6% Dividend Too Risky?

The Kraft Heinz Company (NASDAQ:KHC) currently pays investors a dividend yield of around 6% per year. The company slashed its dividend payments in 2019 from $0.625 per share to $0.40, but the payouts are still fairly high.

A big part of the reason for Kraft's high yield is that the stock has been performing poorly, down more than 60% in the past two years.

To make matters worse, the stock was downgraded on Friday with its bonds now having a "junk" status. Despite its challenges, the company remains committed to the dividend but at the same time it's still looking to improve its financials.

Kraft's Seniors VP of Corporate Affairs Michael Mullin stated that "We also remain committed to reducing leverage over time as we re-position the company for sustainable growth and returns."

In its year-end results released last week, the company's net income of $1.9 billion was a modest 7.7% of its net sales. And while that was an improvement from 2018 which was hit by writedowns and where Kraft incurred a loss of more than $10 billion, it was nowhere near 2017's performance where net income was nearly $11 billion in the black.

With a business that looks to be in trouble and where sales are not growing, a dividend is not enough of a reason to justify investing in Kraft.

While the management may want to keep the dividend intact, if the company doesn't get out of this tailspin it may have no choice but to free up some cash flow in order to help pay down some debt, which totals more than $28 billion as of Dec. 28, 2019.