No Wonder Heinz Investors Are Discontented (HNZ)

Recently, I wrote a brief post on Heinz, mentioning the rumors that were circulating at that time about Nelson Peltz and his potential involvement.

Well, as published in CFO.com, the rumors were confirmed on Friday as the CEO of Heinz began a campaign to retain his board and oppose Mr. Peltz’ slate.

While Mr. Peltz has enjoyed great success recently with his involvement in Wendy's, getting three seats, as well as acceleration of Wendy’s spin-off of Tim Horton’s and the potential spin-off of Baja Fresh. Apparently, he has also been very influential in the soul-searching and shareholder value investigation that is currently taking place at Cracker Barrel.

As I mentioned in my earlier post, this will not be an easy battle:

From a governance standpoint, the company has an 80% super-majority vote requirement to make certain governance changes. Given its Pennsylvania incorporation and the PA legislative propensity to quash minority shareholder rights -- as demonstrated to Relational Investors recently in its lawsuit against Sovereign Bank (SOV) -- this could be a very nasty battle of pyrrhic proportions.

Bill Johnson, the CEO of Heinz, speaks of the return of capital to shareholders that has been achieved. The share buybacks and increased dividends certainly demonstrate improved attention to shareholders. Share buybacks on a TTM basis have been (net of share issuance) $1.4 billion. This compares to the prior corresponding period’s $365 million. Similarly, the dividend has grown to 30 cents per share quarterly from its prior 28.5 cents quarterly.

Shareholders may be more willing to pay attention to Mr. Johnson’s arguments had he retained a significant equity position in his company. It is difficult to listen to someone who tells you how much better it is for you as a shareholder when last month, Mr. Johnson sold 262,488 shares of stock for proceeds of $9.25 million. In fact, in the last twelve months, only one purchase of HNZ stock in the open market by an insider, the CFO, for a grand total of 1,000 shares. If you really think I should be a Heinz shareholder who entrusts this management with shareholder value creation, shouldn’t you believe your own story or as Buffett says, eat your own cooking?

Return on invested capital at HNZ has meandered over the last several years. When Bill Johnson took the responsibility for capital allocation as CEO in 1998, the ROIC was 16.1%. By astute management, creation of shareholder value (ahem), and restructuring, the ROIC took the following trajectory:

1998 16.1%

1999 11.1%

2000 7.7%

2001 11.3%

2002 13.1%

2003 9.3%

2004 12.1%

2005 12.0%

Q1 06 11.3%
Q2 10.4%
Q3 8.9%

Is it any wonder that HNZ shareholders seem so discontented?

I have totaled Mr. Johnson’s salary, bonuses, and “other comp