More from this Author
- September 20, 2012
- September 17, 2012
- September 6, 2012
- August 23, 2012
In times past and even recently, I’ve heard investors criticize those who “play it safe” by holding shares of very large, well-established and slower-growing companies. Even though they often pay healthy dividends, such stocks just don’t deliver the returns of newer, smaller and faster-growing companies, these investors often argue.
Well, I’m here to tell you safety is a good thing — and April 10 was a prime example.
Indeed, I believe shareholders in this company — Pittsburgh-based H.J. Heinz Co. (NYSE: HNZ) — will be able to sleep much better if things continue to get rough in coming days, as I believe they will.
I wanted to be wrong, but the possible correction I warned about a couple weeks ago seems to be gradually materializing and could persist for weeks or even months. In times like these, there’s nothing like knowing you hold shares of safe companies like Heinz, because they make the ride so much smoother. In Heinz’s case, the stock is typically about 60% less volatile than the overall market.
This high level of safety stems from many factors, not the least of which is a 140-year history of leadership in the packaged foods industry. While the company’s namesake brand still accounts for about 40% of revenue ($10.7 billion in 2011), Heinz long ago expanded its product portfolio to include things like frozen food, soup, beans, pasta meals and infant nutrition, and it owns some other big-name brands including Ore-Ida and Weight Watchers. The company regularly revamps existing products and rolls out new ones, like bottled balsamic ketchup — tomato ketchup with balsamic vinegar — which it launched Oct. 27, 2011. On Feb. 4, 2010, Heinz announced its new squeeze ketchup packets, designed to be a lot less messy than previous squeeze packets.
Moves like these are exactly what have helped Heinz to be such a safe, reliable investment for so long.
Even though analysts predict annual revenue growth will slow from about 6% during the previous five years to about 4% for the next three to five years because of more tepid economic conditions in developed countries, I’m not discouraged at all. Earnings are forecasted to rise almost 9% a year, a marked improvement from the 6% growth rate of the past five years.
There are two main reasons for this, and aggressive cost-containment is one of them. Heinz announced plans in November 2011, for example, to close three factories in 2012, in addition to five others already in various stages of shutting down, and eliminate up to 1,000 jobs. The company is also in the process of building a European supply chain hub in The Netherlands, with the aim of consolidating and streamlining manufacturing, inventory control, sales activities and other operations throughout Europe. Although these initiatives will reduce operating income by about $215 million in 2012, the result should be much better efficiency and significantly reduced operating costs in the long run.
The other big boost to the bottom line in coming years: emerging markets, which currently account for 20% of sales. According to management, at least 30% of sales will come from emerging markets by 2016, especially Russia, China, India and Brazil, where ketchup and other Heinz products are quickly growing in popularity. The firm’s infant nutrition line — which includes items like baby food, infant formula and snacks for toddlers — is doing particularly well in emerging markets, with annual revenue of $1.2 billion. Sales of the infant nutrition products are climbing 16% annually in emerging markets and are especially brisk in India, where consumers are on track to spend nearly $200 million on these products in the fiscal year ending this month.
Heinz’s dividend, currently $1.92 a share (good for a 3.6% yield) should continue to be reliable. Analysts project an annual growth rate of 5%, which would bring the payout to $2.45 a share in 2017.
Risks to Consider: The economy is still very touchy, and any new shocks could cause consumers to more aggressively seek off-brand bargain alternatives. To help counteract this possibility, Heinz has been introducing bargains of its own, like a 10-ounce pouch of ketchup for $0.99 and a one-pound package of french fries for $1.99.
Action to Take –> Heinz’s record speaks for itself. The company has been around virtually forever, it’s well-managed and highly adaptable. It’s shareholder-friendly, too, since management aims to pay out 60% of earnings as dividends — a goal the company typically comes very close to achieving each and every year. Growth hasn’t been spectacular, but it has been solid and should continue to be. And you can usually count on the stock to be far less volatile than the overall market.
You’d be hard-pressed to find a safer, more reliable stock. If your portfolio could use a nice dose of safety, then buy shares of Heinz. With a price-to-earnings (P/E) ratio of 18, the stock only looks a little more expensive than the S&P 500, which has a P/E ratio of 16. However, it is noticeably cheaper than the P/E ratio of 22 for the packaged foods industry as a whole.
– Tim BeganySource: StreetAuthority