A Saucy Dividend You Can Count On
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In the stock market words like stable, boring, and consistent won't get much attention. In fact, many times investors are in such a hurry to find “the next big thing” that they forget those well established businesses that just keep growing year after year. Heinz (NYSE: HNZ) is the epitome of a boring business that just keeps growing. Many investors choose to ignore this ketchup king, and that's fine with the company. In the meantime, they improve their business, generate cash flow and keep raising their dividend. When the company reports earnings, investors don't expect a lot of surprises, but Heinz has a few tricks up its sleeve.
Competition:
There are three major players that come to my mind when it comes to sauces and food items. Heinz of course we've mentioned, and ConAgra (NYSE: CAG) is another with their Hunts line and Healthy Choice options. The biggest player in this game is Kraft (NASDAQ: KRFT) with their iconic A1 sauce, Kraft Mayo, Miracle Whip, as well as the company's many stack and food products. What all three companies have in common is: people have to eat, millions use condiments on a regular basis, and all three companies offer food items of their own. This is the type of business that famous investor Peter Lynch used to talk about. He did like small-cap growth companies, but he said he always kept some “stalwarts” in his portfolio to smooth out the ride.
Why Heinz?
Heinz caught my eye for two primary reasons. The first is, the company has a history of consistently raising its dividend. Secondly, the company's Heinz brand has been built up over decades and there is huge value in just the name alone. What really impresses me though is, the company's willingness to reward its shareholders in the form of share buybacks and higher dividends. For investors who would say this stock is too boring for them, consider if you bought Heinz just five years ago in March of 2007, you would have paid about $42 a share. Those same shares sell for $56 today (a nice little gain of its own), and because of dividend increases, your effective yield would be 4.9%. Analysts are calling for 6.8% EPS growth, and the company has been increasing its dividend on average by 6.4% a year. If this is boring I'll take it.
Recent Earnings Strength:
The company reported a sales decline of 1.5%, but this masked the fact that sales in local currencies were actually up 4.2%. This might not sound impressive, until you realize that this was the company's 29th consecutive quarter of organic sales growth. What really caught my eye were two numbers in particular. First, the company saw 19.3% organic sales growth in their emerging markets. Second, the company's emerging market sales only represent 26% of their total. For a company that has been around as long as Heinz, this tells me that there are potentially decades of sales increases ahead as the company expands its international presence. In addition, while EPS was up 10%, adjusted EPS actually increased 15.2%.
Strong Financials & Future Growth:
The company's financials indicate that investors should be not only able to expect further dividend increases, but good growth in the future as well. Heinz said they expect “at least 4% organic sales growth,” and an increase in EPS under constant currency of 5% to 8%. In addition, the company expects operating cash flow to be “at least $1 billion.” In the current quarter, Heinz generated over $250 million in free cash flow and paid out about 64% of this in dividends. In the last few years, the company's free cash flow payout ratio has actually dropped from 60% to 46%. Heinz is also committed to repurchasing shares, and retired 0.4% of their diluted share count over the last year.
Conclusion:
It is a tough comparison trying to decide between Heinz and Kraft, but ConAgra seems to be a third best option. ConAgra pays a similar dividend yield at about 3.7% versus 3.68% at Heinz. Both companies are expected to grow earnings in the 6% to 7% range, but ConAgra doesn't have the dividend growth history that Heinz possesses. From 2004 to 2009, ConAgra's dividend payout barely moved. Another issue with ConAgra is, the company's operating cash flow has declined sequentially over the last three years.
Where Kraft is concerned, my main issue with the company is they got worried about the economy in 2008 and suspended dividend increases. Though the company is expected to grow faster than Heinz, the yield is nearly 1% less. Looking at the company's recent free cash flow payout ratio of just 30.89%, you have to wonder why isn't the company increasing its dividend again?
This leads us to the king of ketchup. Heinz sports an attractive 3.68% yield, is growing earnings consistently, and has good organic growth. They have beaten earnings estimates in each of the last four quarters, and are averaging an over 6% increase in their dividend each year. With a yield that is soundly above the market average, and dividend increases that should keep investors ahead of inflation, the stock looks attractive. Sometimes a stable, boring, and consistent performer is exactly what investors should look for. Heinz seems to fit this description perfectly.
MHenage has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend H.J. Heinz Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
