Stock Analysis: H.J. Heinz (HNZ)

If you ever seen a ketchup bottle before than you have heard of H.J. Heinz (HNZ). Heinz is the largest ketchup manufacturer in the United States. Heinz which is headquartered in Pittsburgh, Pennsylvania sells its food products in over 200 countries worldwide. Heinz isn’t just about ketchup. Heinz sells mustard, relish, pickles, gravy, vinegar, prepackaged meals, and numerous sauces. Heinz even sells frozen food products under the Ore Ida, Weight Watchers, Bagel Bites, Boston Market, TGI Fridays, and Budget Gourmet brand names. The company sells over 150 brands worldwide.

Heinz products are consumer staples that sell well during economic recessions and booms. Earnings have grown 5.8% over the past 5 years and the company has increased its market share to over 50% of the North American ketchup market. Heinz derives 55% of its $10 billion dollars in annual sales from the North American market alone.

The balance sheet is heavily levered with the company having under $500 million in cash and over $4.7 billion dollars in long term debt. This is not a long term problem for Heinz since the company does generate lots of free cash flow bringing in over $1 billion dollars over the past 12 months.

Sales growth is estimated at 4% for next year which is reasonable for a mature consumer staple company. Earnings are expected to grow 7.3% over the next 5 years. Heinz is expected to earn $3.05 a share for the full year and the stock currently sells for $44. The stock is reasonably valued trading at 14.5 times this year’s earnings. This is right in line with the industry average.

Heinz pays investors $1.80 per share and the stock is currently yielding 4% which is a solid payout. The dividend is definitely sustainable with Heinz paying out 59% of earnings via distributions to shareholders. Heinz has a history of generous dividend payouts with the company recently increasing its dividend 7.1% this past May. According to the company website, Heinz has increased its dividend “nearly 67% over the last seven years for a compound annual growth rate of 7.6%.”

I would feel comfortable buying Heinz at $39. The stock is not cheap but it’s not expensive either. Heinz is a nice defensive play for investors seeking safety from the turbulent stock market. Income seeking investors may find shares attractive because of the fat dividend yield. The 4% yield beats the rate that any long term bonds are paying right now.

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