Heinz: Dividend Stock Analysis

Feb.13.12 | About: The Kraft (KHC)

You may or may not be as bullish as me for 2012 and I can understand why. However, it doesn’t mean that you should avoid investing. There are a few great defensive stocks that should do well regardless if we experience a good or bad year. In fact, even for bullish guys like me, having a few “rock solid” stocks that will produce strong dividend payouts despite slower growth is important. It enables one’s portfolio to be more stable through tough times. As I’ve mentioned before, I would rather buy “safe stocks” than bonds at the moment. If you are looking for defensive stocks, one industry you should be looking at is the food industry. In my Best dividend stocks for 2012 eBook I’ve selected 2 of them as part of the 32 selections (FLO & GIS). Today, I’m looking at another food giant: Heinz (HNZ) because my kids love ketchup!

Heinz Stock Description:

A company more than 100 years old (HNZ was founded in 1869 and incorporated in 1900!), Heinz manufactures and markets food products across the world. Heinz is definitely well known for their condiments, sauces, frozen foods, soups and meals. Heinz had restructured its company back in the 2000s to make it more profitable and get rid of less money making products. As a result their main revenues come from ketchup & condiments (42.4%) and meals & snacks (40.9%). Besides its famous ketchup, Heinz also owns Classico, Jack Daniels (really!?!), ABC, Bagel Bites, T.G.I. Fridays. HNZ is also concerned about health and sustainability and is part of the DJSI (Dow Jones Sustainability Indexes).

Stock Graph

HNZ

HNZ Dividend Metrics Ratios and Financial Info:

Ticker HNZ
Name HJ Heinz Co
Dividend Metrics
Current Dividend Yield 3,73
5 year Dividend Growth 6,96
1 year Dividend Growth 6,78
Company Metrics
Sales Growth (1 year) 2,02
Sales Growth (5 year) 5
Earnings growth 6,21
P/E ratio 16,46
Margins growth 0,62
Payout ratio 58,23
Return on Equity 39,58
Debt to Capital Ratio 0,31
Click to enlarge

HZN Trend Analysis: Negative Trend

HNZ Technical AnalysisClick to enlarge

As shown on this graph, HNZ is showing a negative technical analysis trend (-70 on a scale of -100 to +100). I guess it’s not the most hottest stock at the moment!

Upcoming opportunities and dangers:

I must admit that I’m a bit ambivalent with regards to HNZ. On the one hand you have a solid company operating in several countries with very strong branding. On the other, you have a company that demonstrates small growth numbers (5% over 5 years) compared to a relatively high P/E ratio (16.46). Since the S&P 500 is trading at a P/E ratio under 14, you can tell that HNZ is trading with a premium. And this is exactly what bugs me: what justifies the premium on HNZ?

Is it because investors are looking for defensive stocks and are ready to pay a premium for stability? If this is the case, the only thing you will get in the upcoming years from HNZ will be its dividend yield as the stock price will most likely be kept on the back burner for a while.

The fact that Heinz will be closing an additional 3 factories will generate costs in 2012. The payout ratio is acceptable (58%), but we can see it going over 60% this year as it will cost $0.15 per share to close these factories (that was on top of the $0.35/share previously announced by the company).

Profit margins will be under pressure due to the rising cost of commodities and a tough economy in Europe. I guess that there is no company that can expect to live off of emerging market expansions forever, right?

Nonetheless, HNZ is keeping its 2012 guidance which includes a sales growth forecast of 7-8% and an EPS growth of 6% to 8%. So I guess that investors are willing to pay a premium for a stable giant which still pay a great dividend!

Final Thoughts on HNZ

The rationale behind buying HNZ or not depends on your investor profile and overall portfolio. If I didn’t have “rock solid stocks” such as JNJ and KO in my portfolio, I think I could be interested in buying a steady dividend payer such as HNZ. It pays more than bonds and I don’t expect any bad surprises coming from this company for 2012.

On the other hand, the stock doesn’t seem as appealing because of its premium factored into the price. I would wait until the price drops a little before making any move. Overall, HNZ is definitely not going to grow in 2012 so you are basically buying it for its dividend.

Disclosure: I do not hold shares of HNZ at the moment.