The Kraft – Heinz teachable moment about debt
Bottom Line: Something that we almost all get, even if we don’t want to deal with it, is that debt is generally a bad thing and too much of it is a really bad thing. Of course, all debt isn’t created equal. An affordable mortgage will almost always be better than renting over the long run for example. Buying a reliable vehicle with a reasonable interest loan is almost always better than leasing. There are a few other examples but literally only a few. And that takes me to the Kraft Heinz debacle that’s turned the stock’s performance into mainstream news.
Sales are still rising for the food behemoth, topping $26 billion this year. The company based on operations alone would be uber profitable. But that’s the thing. It’s not the operation of the company that’s reared its ugly head sending the stock from over $90 a share less than two years ago down to the low $30’s today in the midst of a record run for the stock market. It’s servicing its debt.
A quick check of the company’s balance sheet shows that it has well over a billion of cash available. That’s a lot of money...until you look at what’s right below it. More than $32 billion in debt. That’s painful and that’s the problem. Just the cost to service the debt is chewing up all of the profit the company would otherwise be producing. It’s a reminder about your habits in everyday life and my long-term investment strategy which is...
- To invest in companies that are growing revenue year-over-year
- Companies that have more cash/assets than debt on their balance sheet
- Companies that pay a consistent and/or rising dividend
Kraft isn’t worth investing in and hasn’t been for many years. The debt issue is the single biggest reason why. It doesn’t matter how much money you bring through the door if it takes more than that to pay for what you’ve already spent. There area number of companies that levered up on debt when interest rates were at record lows. This could be the first of many shoes to drop. It could be a good time to review the balance sheet of your investments if you haven’t done it in awhile.