H.J. Heinz: Strong Payouts Keep Investors Happy

| About: The Kraft (KHC)

Shares of H.J. Heinz (HNZ) ended the trading week near its all-time highs. The company known from its namebrand ketchup, sauces, soups and other food products reported its second quarter results for its fiscal 2013 on Tuesday.

Second Quarter Results

Heinz reported second quarter revenues of $2.83 billion, up 0.5% on the year before. Sales were driven by organic sales growth of 3.3%, on a 1.9% increase in prices and 1.4% volume growth. Sales were offset by a 2.4% currency headwind, and divestitures reduced sales by 0.4%.

Sales fell slightly short of analysts expectations of $2.85 billion, as organic sales growth fell short of managements internal targets of 4%. Gross profits rose 1.8% to $1.01 billion, as gross margins rose 40 basis points to 35.8%. This excludes productivity charges taken last year.

Operating income rose 9.4% to $392 million, resulting in net income from continuing operations of $290 million, up 22.3% on the year. Diluted earnings per share rose 23.3% to $0.90 per share, beating consensus estimates by two cents.

The board of directors approved the continuation of the share repurchase program and recently announced a multi-year program of another 15 million shares.

CEO and Chairman William R. Johnson commented on the results:

Heinz delivered solid results while making significant investments in our business andbrands to drive growth. Notably, Heinz delivered its 30th consecutive quarter of organic sales growth, led by our trio of growth engines: Emerging Markets, Global Ketchup and the Company's Top 15 Brands.

Detailed Information

North America

Sales in North America rose 0.1% to $795 million, driven by a 0.4% growth on an organic basis. Volumes rose 1.2% on strong performance of Heinz Gravy and Ketchup, offset by prices which fell 0.8%. Operating income fell 5.7% to $190 million on higher marketing expenditures.


Sales in Europe fell 4.2% to $808 million. Sales volumes rose 0.3% on strength in Russia, partially offset by weakness in Italy and the Netherlands. Prices fell 0.2% across the board. Divestitures resulted in lower sales of 0.6%, while a strong dollar impacted sales by 3.8%.

Operating income fell 2.8% to $140 million, as a result of the strong dollar and higher marketing expenses.


Revenues in the Asia/Pacific region rose 2.3% to $606 million. Organic sales rose 4.1% on a 1.9% increase in volumes and a 2.2% increase in prices. Operating income rose 24.5% to $50 million.

US Foodservice

Sales in the US foodservice business rose 4.1% to $348 million, entirely driven by organic sales growth. Growth in Ketchup was offset by weakness in soup. Sales grew largely on the back of higher prices to offset increased commodity prices. Operating income rose 26.8% to $44 million on productivity initiatives.

Rest of World

Sales in the rest of the world rose 8.6% to $270 million. Organic sales rose 19.8% on a 6.5% increase in volumes, driven by Heinz's acquisition of Quero in Brazil. Prices rose 13.3%, while weakness in Latin American currencies reduced sales by 11.3%.

Operating income fell 15.6% to $27 million on weakness in local currencies and high inflation rates in Venezuela.


For the full year of its fiscal 2013, Heinz expects organic sales growth of 4.0% or more. Constant currency earnings per share growth is expected to come in between 5 and 8%, excluding charges for productivity increases taken last year.

Analysts expected Heinz to guide for annual sales of $11.8 billion, on which Heinz could earn $3.52 per share.


Heinz ended its second quarter with $1.0 billion in cash and equivalents. The company operates with $5.0 billion in short and long term debt, for a net debt position of roughly $4.0 billion.

For the first six months of its fiscal 2013, Heinz generated revenues of $5.6 billion. The company net earned $547.5 million, or $1.71 per diluted share. Heinz is on track to generate annual revenues of approximately $11.8 billion. The company could earn $1.14 billion, or around $3.50 per diluted share.

The market currently values Heinz at $18.7 billion. This values the firm at 1.6 times annual revenues and 16-17 times annual earnings.

Heinz currently pays a quarterly dividend of $0.51 per share, for an annual dividend yield of 3.5%.

Some Historical Perspective

Year to date, shares of Heinz have risen some 8%. Shares started the year around $54 per share to fall to lows of $51 a month later. From that point in time, shares steadily gained ground currently exchanging hands around $58, the highest level ever.

Shares of Heinz fell from $50 in 2008 to lows of $30 in the beginning of 2009. From that point in time shares steadily gained ground trading at all time highs at the moment. Between its fiscal 2009 and 2012, Heinz grew annual revenues from $10.0 billion to $11.6 billion in 2012. Net income stagnated around $923 million.

Investment Thesis

Shares of Heinz had a good run in recent years. Traditional income investors who used to invest in bonds, are searching for dividend yield as interest rates have come down. On the other hand, many equity investors are searching for stable companies which are well managed and have diversified operations.

Heinz targets for organic sales growth of 4% this year, as CEO Johnson targets that emerging market sales will make up 30% of total revenues in 2016. Besides growing operations, Heinz pays out a dividend yield of 3.5%. It furthermore repurchases shares at a rate of 2.2% per annum, marking annual payments of 5.7% to shareholders. The board recently approved another 15 million share repurchase program, sufficient to retire another 4.7% of its shares outstanding.

I reiterate my stance. Heinz is a safe investment for long term investors. Don't expect spectacular returns, but patiently receive your dividends accompanied by modest capital gains.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.