Company Description: The H.J. Heinz Company produces a wide variety of food products worldwide, primarily condiments, convenience meals and snacks.
Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value, see page 2 of the linked PDF for a detailed description:
1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number
HNZ is trading at a premium to all four valuations above. Since HNZ's tangible book value is not meaningful, a Graham number can not be calculated. The stock is trading at a 75.3% premium to its calculated fair value of $30.50. HNZ did not earn any Stars in this section.
Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:
1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%
HNZ earned two Stars in this section for 1.) and 2.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. The company has paid a cash dividend to shareholders every year since 1911 and has increased its dividend payments for 8 consecutive years.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA) or Treasury bond? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
1. NPV MMA Diff.
2. Years to > MMA
The NPV MMA Diff. of the $243 is below the $2,700 target I look for in a stock that has increased dividends as long as HNZ has. If HNZ grows its dividend at 3.6% per year, it will take 5 years to equal a MMA yielding an estimated 20-year average rate of 4.1%.
Memberships and Peers: HNZ is a member of the S&P 500. The company's peer group includes: Campbell Soup Co. (CPB) with a 3.4% yield, General Mills, Inc. (GIS) with a 3.3% yield and Kellogg Company (K) with a 3.2% yield.
Conclusion: HNZ did not earn any Stars in the Fair Value section, earned two Stars in the Dividend Analytical Data section and did not earn any Stars in the Dividend Income vs. MMA section for a total of two Stars. This quantitatively ranks HNZ as a 2 Star-Weak stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $26.46 before HNZ's NPV MMA Differential increased to the $2,700 minimum that I look for in a stock with 8 years of consecutive dividend increases. At that price the stock would yield 7.25%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $2,700 NPV MMA Differential, the calculated rate is 10.4%. This dividend growth rate is well above the 3.6% used in this analysis, thus providing no margin of safety. HNZ has a risk rating of 2.00 which classifies it as a Medium risk stock.
HNZ has a solid brand portfolio and is well-positioned for long-term growth. The company enjoys relatively stable end markets and is able to generate strong cash flows. In addition, its low debt level and dividend payout provide an excellent environment for future dividend increase. Unfortunately, a low dividend growth rate of 3.6% resulted in a low calculated fair value of $30.50. So for now, I plan to watch HNZ and not buy it.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I held no position in HNZ (0.0% of my Income Portfolio). See a list of all my income holdings my income holdings here.
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