Buying shares that trade at high multiples can be risky. The recent sell-off in growth stocks demonstrates this quite well.

In my view, there’s much more to this stock than meets the eye though. I think that it’s a cheap stock that can give my dividend income a real boost.

Kraft Heinz

In my view, there’s a lot to like about Kraft Heinz as a business. First, it makes products that I think will likely experience stable demand even in a recession.

Second, the company has been using its cash to improve its balance sheet. There’s still debt in the company, which creates risk going forward, but total debt has reduced by around 33% over the past five years.

And there’s a dividend, which yields around 4.5%. With interest rates rising, there’s a danger that this might not look attractive in the future, causing the stock to fall, but I think it looks like a good source of passive income at the moment.

Finally, Warren Buffett owns around 25% of the company and has done so for some time. This means that the company will likely have a source of capital if things get difficult.

All of this makes me think that Kraft Heinz is a stock I’m happy owning in my portfolio. But are its shares cheap at today’s prices?

Valuation

Kraft Heinz shares trade at a P/E ratio of nearly 30, which is higher than Apple (23), Netflix (20), and Visa (26). This makes the stock look expensive, but I think that it’s misleading.

The company reported a net profit of $1.2bn over the last 12 months. But that number is the result of subtracting an asset impairment charge of around $2bn from its operating income.

An asset impairment charge involves the company lowering the accounting value of its assets. In the case of Kraft Heinz, the company has a lot of intangible assets in the form of brands.

This doesn’t involve any cash leaving the business. But it still shows up as a cost in the income statement and makes the company’s net income number lower.

I think this means that Kraft Heinz’s net income doesn’t accurately reflect its profitability. In my view, the $3.2bn in free cash that the business generated over the last year is a better metric.

Non-cash charges, such as asset impairments, don’t affect free cash flow. So I think that looking at the company’s cash flow statement gives a better view of how cheap its shares are.

At today’s prices, the stock trades at a price-to-free-cash-flow (P/FCF) multiple of around 15. Viewed this way, the stock is clearly cheaper than Apple (24), Netflix (635!) or Visa (29).

A stock to buy

As a stock, Kraft Heinz certainly isn’t without risk. But I think that it’s well-protected from the risks that come with owning an expensive stock.

The company’s strong cash generation and attractive dividend give me confidence in owning its shares. At today’s prices, I’m looking to keep buying.

Over time, I hope to use this strategy to build a substantial asset base. For now, I’m concentrating on finding stocks to buy that will generate cash that I can use to reinvest elsewhere.

Three stocks are on my radar to buy in September. Each of them generates significant free cash that it returns to shareholders, providing me with capital to deploy elsewhere.

Legal & General

First on my list is Legal & General (LSE:LGEN). At current prices, the stock has an eye-catching dividend yield of 7.1%.

It’s difficult for insurance companies to differentiate themselves. But I think that the company’s history gives it something that makes it stand out over the competition.

For obvious reasons, it’s important to customers that a life insurer will be around for a long time. Having been around since 1836, Legal & General is strong in this regard.

The downside to Legal & General is that life insurance is a difficult business to predict. It involves writing policies today without knowing whether or not they will be profitable in the future.

Rising interest rates, however, go some way towards offsetting this risk. Higher interest rates allow the company to earn a stronger return on the premiums it takes in.

I doubt that the Legal & General share price is going to feature in the FTSE 100 top performer list any time soon. But as a company that will distribute cash that I can reinvest elsewhere, I think it looks attractive.

Kraft Heinz

I’m also looking at Kraft Heinz (NYSE:KHC). The stock has a dividend yield of just over 4%, which isn’t as attractive as Legal & General, but I think that it looks attractive at the moment.

The stock is one of Warren Buffett’s largest holdings in the Berkshire Hathaway portfolio. I think that it would make a great addition to mine in September.

I see Kraft Heinz as a steady business. Demand for its products might fluctuate a little bit, but I think it is likely to remain reasonably consistent over time.

At first sight, Kraft Heinz looks unremarkable. Revenues have been mostly steady and the dividend hasn’t increased since 2018.

Importantly, though, the company’s debt has reduced considerably over this time. Total debt is now under $21bn, down from around $31bn.

The biggest risk to this business, in my view, is inflation. Passing the increased costs of labour, commodities, and transport through to consumers is going to be difficult.

Recently, though, management has been increasing investment in the company’s brands. In my view, this gives Kraft Heinz the best chance of increasing prices without losing customers. 

This marks a significant change of approach to the previous focus on short-term margins. And I think that this is the right approach for Kraft Heinz going forward, which makes me confident buying the stock today.

Things people use

Unilever is one of the 10 companies that control everything that we buy. These companies make things like food, cleaning products, and toiletries.

An increased cost of living might force consumers to spend less on things that they can do without. But while this might be bad news for companies that sell holidays and cars, it’s less likely that we’ll make significant cutbacks in things like food and toothpaste.

In order to see why I think the Unilever share price might be attractive with a recession on the horizon, let’s compare it to two of the other companies that control everything that we buy: Kellogg (NYSE:K) and The Kraft-Heinz Company (NYSE:KHC).

Brand power

Each of these companies draws strength from its portfolio of well-known brands. Strong brands allow businesses to charge a premium for their products. That should result in higher operating margins. So in order to evaluate brand strength, let’s see how Unilever’s operating margin have compared with operating margins at Kellogg and Kraft-Heinz over the last four years.

As we can see, Unilever’s operating margin is consistently the highest of the group. That indicates to me that it’s able to charge a premium price for its products.

Debt

Unilever, Kellogg, and Kraft-Heinz all carry significant amounts of debt. Paying interest on debt can obstruct a company’s ability to make money for its shareholders. We can assess Unilever relative to its rivals here by comparing each companies interest expense — the amount of interest the company pays on its debt — with the company’s operating income. The results are as follows:

Of the three, Unilever pays the smallest amount of its operating income out as interest on its debt. This is a good thing. It should give the company greater financial flexibility and give it better opportunities to adapt its business in the future.

Conclusion

Unilever seems to be able to use its strong brand portfolio more effectively than its rivals and it also has the interest payments on its debt well under control. Investing in Unilever comes with risk as the company attempts to restructure its product lineup in pursuit of growth. And I wouldn’t expect Unilever shares to be entirely immune from a general movement downwards in the stock market. But if I were looking to buy shares in a consumer products company to protect myself from an upcoming recession, I’d be looking at the Unilever share price as a buying opportunity today.