Heinz's Choppy, Sluggish Earnings Do Not Impress

| About: The Kraft (KHC)

Next up in our food stock battle royale is HJ Heinz (HNZ). With over a decade of operating history, Heinz has grown into a global player with 60% of revenue coming from overseas. Its products not only include the ubiquitous ketchup brand, but frozen food, sauces, beans and infant nutrition. Strong, predictable free cash flows make Heinz a popular dividend growth name.


Earnings per share have not been as consistent as I like to see and have grown rather slowly at 5.2% annually for the last 3 years.

Heinz's Earnings per Share

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
2.36 1.60 2.27 2.13 1.89 2.36 2.63 2.90 2.71 3.06


Great businesses typically generate strong cash flows and require little debt financing. I like to see long-term debt less than three times current net earnings. With long-term debt of $3 billion and trailing 12-month net income of $990 million, Heinz ought to be careful not to accumulate more debt. On a positive note, overall debt has been declining in recent years.

Return on Equity

Companies that consistently deliver high returns on equity create the true wealth for shareholders. Average businesses typically offer a 12% return on equity while great businesses return over 15%. In Heinz's case I've used the Return on Invested Capital metric to make sure returns aren't being driven by debt.

Heinz's Return on Invested Capital (rounded)

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
13 9 12 11 9 12 12 14 13 14

Heinz's 10-year average ROIC is 12%.

The Dividend

Heinz currently offers a 3.6% yield supported by a 64% payout ratio. It has increased its dividend for 8 years in a row at an average 7.4% clip over the last 5 years. With a payout ratio on the high side, dividend growth may slow as margin pressures build.

Retained Earnings

I want to own companies that are free to reinvest retained earnings at high rates of return. What I don't want to see is high research and development costs or capital expenditures in the form of plant and equipment replacement. A look at Heinz's balance sheet reveals that it regularly spends a quarter to a third of net income on property, plant and equipment but has no R&D costs. This is inline with industry averages. SG&A costs have been rising and should be monitored for margin drag.


At $52.77, Heinz sells for a P/E of 17.6, which is higher than its historical average of 16.4. Based on projected growth of 8% annually, its PEG ratio is 1.8, which doesn't exactly make it a bargain. And I'm not sure an 8% growth rate is realistic anyway as sales have wobbled around in the low single digits for a decade. Given its growth profile, it's hard for me to get too excited about Heinz. In my next article, we'll see how it stacks up against J.M. Smucker (NYSE:SJM).

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.