H.J. Heinz: Almost Ready to Supersize My Position

I love burgers and fries, but who doesn't? The next time you head to your local In-N-Out, McDonald's (MCD), or local burger joint, take a look around and see how many people eat their fries with ketchup. The next stock to watch is H.J. Heinz (HNZ), the #1 ketchup producer and distributor. Beyond ketchup, Heinz offers condiments, sauces, soups, beans, pasta meals, infant nutrition, other processed food products, and frozen potatoes, entrees, snacks, soups, desserts, and appetizers. We were told to have gold in our portfolio for inflation hedge. The good news is that can of beans will do just that.

Analysts will say commodities cost is a risk. It could be, but this could already be priced into the stock as HNZ declined from its peak of $53 to the 52 weeks low of $30.51. The stock is currently trading at/around 5% dividend yield. Since 1992, Heinz has been consistent with dividend payout as and dividend raise with one exception of 2003 when dividend was reduced by 34% (from $1.66 to $1.08).

With that figure calculated in, Heinz has been raising their dividend on a compound annual growth rate of 5% since 1992. The most recent quarter announcement was music to my ear when they announced a 10% drop in profit, but raised their dividend by 1.2%. The annualized dividend stands at $1.68 per common share.

One of the biggest consideration in purchasing an investment isn't forecasting the price of the investment, but rather the value (price you pay) of a stock. Value determines the long run of an investment and according to a third party research firm, HNZ fairly value is $48. My proprietary model has a buy value at $35 which is above the current price. My fair value is at $42 or yield of 3.9%.

Things to Consider

Pros:

• ROE - 56.93%

• Payout Ratio 55% (anything more than 60% isn't so good)

• Historical average dividend yield of 3%

Cons:

• Current Ratio - 1.038

• Debt/Market Cap - 0.50 (I'd like to see it being less than 0.50)

• Price/Book - 8.56

• Free Cash Flow/Share - 2.04 (if earning falls, dividend will have to be paid out from cash)

For more statistics, click here. Some data are based on my model.

Frankly, those figures don't worry me much. If a company has a perfect record, it wouldn't be trading at a discount. Some flaws are welcome as long as the company can subsidized you with cash payment, hence the dividend.

Let's keep it simple: you are being paid 4-5% to own shares of the #1 ketchup maker. This is a better alternative to any CDs out there (2% average), even if you incur some risk. If one day burger and fries goes out of style, it may not be worth the price tag. At current valuation, I'll be buying it. If it falls farther, I am going to super size my position.

Caution: I disclosed on March 13, 2009 about my position in HNZ @ $34.56. The stock moved up modestly since then so I would wait for a pull back to establish a position around $35. Break your buying into third so you would buy 1/3 at $35, 1/3 at $33, and 1/3 at $31.

Comments

[Larry House:]

How long do you think profits can drop, but the dividend goes up? HNZ is a solid company, but it isn't anything to get excited about right now except as a defensive position.

Jun 04 11:28 PM

[Arsuron Pap...:]

Larry, no doubt about HNZ being a defensive position. My goal, however, is never to chase after any stock but to acquire them when no one else is really looking. Sure profit can drop, but take a conservative earning estimate of $2.80 (FY 2011) compare that to $2.60 (FY 2010), you'll get 7.7% rise in earning. Remember this is low estimate. This is a simple food company so I can rely on the estimate.

If you want excitement, all you have do is some call, collect cash dividend along with call premium!
Thanks for the comment Larry.

Jun 05 01:20 PM

[Arsuron Pap...:]

Bill Gross (PIMCO) said today "Investors should also protect themselves against the risk of a weakening dollar, the report said."
If that is the case, you can also own HNZ as a hedge because as you saw from the last quarter, their profit dropped 10% on strong dollar.
"Heinz 4th quarter profit drops 10 percent on strong dollar, lower restaurant sales"

Jun 05 02:23 PM