Analysing 3 Defensive Stocks With High Yields

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When the markets are choppy, investing in the diversified food companies with modest yields is a good strategy. People need to consume, which ensures a relatively stable top line for food companies like Heinz (NYSE: HNZ), ConAgra (NYSE: CAG) and Unilever (NYSE: UL). These companies may not offer staggering growth, but investors looking for steady and stable returns over time, should consider investing in this industry.

Why Heinz is Yummy!

Heinz is one of the largest food based companies with a presence in over 200 countries. With prominent names like Complan, Heinz ketchup, and T.G.I Friday in its kitty, it’s hard to not come by this company. Although, its shares are not undervalued by any means, I believe that there is still head room for appreciation.

In 2011, Heinz acquired an 80% stake Coniexpress S.A. Industrias, which is a Brazil based manufacturer of Quero, for $493.5 million. In 2010, the company had acquired Foodstar, which is the leading manufacturer of soy sauce in China, for $165.4 million. These acquisitions not only expanded its product line, but also allowed Heinz to enter into the emerging markets without bureaucratic loops.

Its operations in the emerging world hold the key to its growth. On a quarterly basis, its revenues from Asia rose by 4% while its net income surged by 27%. Its operations in Brazil and China delivered a whopping 33% and 20% organic sales growth, respectively. But, its operations from the emerging nations accounted for only 23% of its revenue, which suggests that there is still huge growth potential.

The company has largely been focusing on organic growth, and consolidating in its existing markets. As a result, over the last 5 years, Heinz has outperformed most of its peers in terms of stock returns, and the company has reported impressive financials for the last 4-5 quarters. Heinz is expected to report earnings in the range of $3.52-$3.62, and the Street is expecting it to again outperform the estimates.

Avoid ConAgra!

So Heinz looks attractive, but is it financially healthy? Only the financial metrics can tell.

<table> <tbody> <tr> <td> <p>Company</p> </td> <td> <p>Forward P/E</p> </td> <td> <p>ROE</p> </td> <td> <p>ROI</p> </td> <td> <p>Net profit margin</p> </td> <td> <p>Yield</p> </td> <td> <p>Debt/Equity</p> </td> </tr> <tr> <td> <p>Heinz</p> </td> <td> <p>15.92x</p> </td> <td> <p>36.08%</p> </td> <td> <p>12.12%</p> </td> <td> <p>9%</p> </td> <td> <p>3.41%</p> </td> <td> <p>144%</p> </td> </tr> <tr> <td> <p>ConAgra</p> </td> <td> <p>14.19x</p> </td> <td> <p>14.46%</p> </td> <td> <p>6.63%</p> </td> <td> <p>4.59%</p> </td> <td> <p>3%</p> </td> <td> <p>78%</p> </td> </tr> <tr> <td> <p>Unilever</p> </td> <td> <p>15.76x</p> </td> <td> <p>30.42%</p> </td> <td> <p>16.84%</p> </td> <td> <p>9.64%</p> </td> <td> <p>3.26%</p> </td> <td> <p>67%</p> </td> </tr> </tbody> </table>

(Source : Finviz)

*ROI = Returns on Investment

*ROE = Returns on Equity

From the table above, it is very much evident that Heinz enjoys a high net profit margin along with impressive returns on capital. Moreover, its yield is pretty high for a major diversified food company. But ConAgra and Unilever have lower debt/equity levels.

Although ConAgra is much less leveraged than Heinz, I’d say, the metrics are telling only one side of the story. ConAgra recently agreed to acquire Ralcorp Holdings (NYSE: RAH) for $4.95 billion, which would be totally financed by debt. Now once this acquisition is through, its actual debt/equity comes out to be 2.05x (0.78 + 1.27). Moreover, Ralcorp Holding has a poor ROI and ROE of 1.21% and 2.73%, respectively, which would further stretch its payback period.

Reasons to Buy Unilever

But there’s nothing against Unilever. The company has been reporting blockbuster earnings, and it recently reported a 11% surge in its quarterly sales growth, on a YoY basis. The management told that its key driver for growth would be innovation and new product launches in countries like India, China and Brazil. Its revenue from emerging markets accounts for 55% of its total revenue, which is higher than Heinz’ (23%).

This suggests that its growth engine might slow down before Heinz’s, but since India and China are resided by more than 2.55 billion people, its product marketing campaigns will play a crucial role. Additionally, since Unilever is well established in India, China, Brazil and South Africa, it won’t have to spend much on brand marketing, and has to largely focus on its R&D. In my opinion, this rationale coupled with solid financials, makes Unilever a solid buy.

Conlusion

Both Unilever and Heinz are great investment options, but I believe that Heinz has more upside potential as it still derives a major share of its revenue from North American and European countries. According to analysts, EPS of Heinz and Unilever are expected to grow at 6.95% and 5.4%, respectively for the next 5 years, and in my opinion, holding both the stocks would be a great way of spreading the risks and rewards.


PiyushArora has no position in any stocks mentioned. The Motley Fool recommends H.J. Heinz Company and Unilever. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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