1 stock I’m buying to build wealth and earn passive income
I’ve been buying a stock that I think has great prospects for both growth and passive income. It has a measure of inflation-resistance, Warren Buffett owns it, and I think it’s cheap at the moment.
It isn’t Apple. I’ll tell you what the stock is at the end. But first, here are some of the features that I think make it a great investment.
Let’s start with growth. In order to build wealth by investing in stocks, the companies I buy share in need to make more money in future than they do today.
The company I’m looking at reported earnings this week and I think they were impressive. But the most impressive thing is how they were achieved.
Its 15% price increases came at a cost of 5.5% volume reduction, resulting in 9.5% revenue growth. On top of this, higher margins made for 13.3% growth in earnings per share.
The ability to increase prices is a sign the company has some protection against inflation. As its costs rise, it can increase prices without driving away too many customers.
Inflation remains a risk though. The business operates in an industry where switching costs are low and its ability to increase prices is – in my view – likely to prove impressive but not unlimited.
Nonetheless, I think the organisation is handling the threat of inflation admirably at the moment. And I see this as a sign of enduring strength.
The stock has a dividend yield of just over 4%, which is higher than most of its peers. Furthermore, I expect this to prove durable.
One reason for this is that I expect the business to generate higher cash flows in future as it continues to reduce its debt. Lower interest payments should leave more cash for shareholders.
In addition, the dividend has – on the whole – been well covered by the company’s free cash flow over the last few years. The record isn’t perfect, but it’s very strong.
I also think the stock is great value at today’s prices. Based on management’s latest forecast, it’s trading at a price-to-earnings (P/E) ratio of 14 times this year’s earnings.
In my view, that’s low. It’s not expensive compared to its peers (more on them in a moment) and it’s especially cheap for a company achieving 9% annual organic revenue growth.
The trouble is, I’m not convinced it’s going to stay that way for long. This share is up 6% over the last six months as investors start to catch on to the business performing well for investors.
The big reveal
So what’s the name? It’s Kraft Heinz (NASDAQ:KHC).
I don’t think its current 13.3% earnings growth is sustainable indefinitely. But I think this is offset by what should be steady demand for its products going forward.
In my view, it measures up well compared to other companies like Diageo, Kellogg, and Unilever. That’s why I think it’s a great investment at today’s prices.
The post 1 stock I’m buying to build wealth and earn passive income appeared first on The Motley Fool UK.
Stephen Wright has positions in Apple, Kellogg, Kraft Heinz, and Unilever Plc The Motley Fool UK has recommended Apple, Diageo Plc, and Unilever Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2023