Now is not really a good time to be in the snack food business. The entire world seems to be moving away from sugar, salt and other foods that are in any way thought of as being unhealthy. Let’s face it, when you hear the name the Kraft Heinz Co (NASDAQ:KHC), you still think of mac and cheese and ketchup. That right there is a pretty bad start in terms of company brand name.

The problem is if one tries to look deeper into the company, for the most part, one finds the types of snack foods everyone is moving away from. That’s not to say these are bad food products.

I enjoy Grey Poupon with the best of them, and if we get to the zombie apocalypse and I stumble across a KHC warehouse, I’m not going to complain. Alas, it doesn’t make for a terribly good investment these days.

There are other problems for KHC stock. Snack foods are still consumed all over the world, and that means there is competition. From the perspective of operations and management, KHC can benefit from trying to create as efficient an operation as possible, yet the overall problem is that the business itself is shrinking because consumers are moving away from these types of products.

At the end of 2017, net sales declined by about 1% to $26.2 billion. If it weren’t for the fact that the cost of products sold declined by $372 million, gross profit would’ve declined as well. However, that along with a substantial cut in SG&A expenses, resulted in a 10% increase in operating income.

If not for the benefit from tax-cut legislation, net income would still have been a very impressive $4 billion, up about 10% year-over-year. But again, this is all due to expense cuts.

Net sales did not decline. We are seeing double-digit sales declines across many other different types of retailers. The good news is that KHC products are so well-known and consumed all over the world. The company is still very profitable.

Questions About Dividend Sustainability

However, I’m a little concerned about the sustainability of the 4.16% dividend for KHC stock. Dividend payments have significantly exceeded free cash flow for quite some time, although some of this is due to accounting adjustments.

However, we are left in a position that feels all too frequent in this market. Kraft Heinz has a decent yield at 4.16%. However, the company itself is experiencing no growth. Nevertheless, it’s trading at 17 times earnings.

I don’t care how famous or legendary a company is or how long it’s been around. If a company is not growing, I don’t see how one can justify a PE of 17. You get a PE of 17 if you are growing earnings at, say, 12% or more, in conjunction with having a fortress balance sheet and robust free cash flow.

Bottom Line on KHC Stock

That’s not the case here. If I want a 4% yield, I can get much more than that with less risk with a preferred stock. I just don’t see the point of owning KHC stock here. I think it’s going to go lower, and I think you should put your money elsewhere.

Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance, and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 23 years’ experience in the stock market and has written more than 2,000 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.