Buying Heinz

5 Jan 2010 by Jim Fickett.

Today I bought shares in Heinz (HNZ, the ketchup and convenience food conglomerate), transferring 1% of my portfolio from cash to this stock. This is a global stock, not too dependent on the US and participating in emerging markets growth; paying a good dividend; and not currently overvalued.

Here is the case for Heinz:

(1) The current dividend yield is attractive, at 4%. No cash account comes close to that.

(2) Heinz is on the right side of one of biggest current trends: the global middle class moving gradually from small mom-and-pop neighborhood stores to supermarkets, and from traditional to convenience foods.

(3) Heinz is not too dependent on the US economy. 60% of sales are outside the US. 15% of sales are in emerging markets, with 10% growth in the last year. The company seems to be quite successful at entering new markets and crossing cultural boundaries (often by acquiring already-popular local brands). (Points in this paragraph are based on data in the Winter 2009 Investor Presentation.)

(4) Unlike many stocks today, this one is not overvalued. Since 1996 it has traded in the range 29-55, and is right about in the middle now, at 43. Thus it seems likely that if one has a little patience concerning the time to sell, it will be possible to get out with some capital appreciation.

(5) In a slow-growth environment, as I expect over the next year or two, convenience foods should still do reasonably well. In an inflationary environment, as I expect longer-term, a dividend stock should do better than a bond (physical assets and business expertise preserve their value better than a fixed number of dollars).

In the last Investment post, I tried to explain why buying some stocks now might make sense, even if the market is over-valued. James Hamilton, an economist who writes at the Econbrowser blog, said it better than I did:

That doesn't mean you should never buy when the P/E exceeds its historical average. If you buy at those times, you may expect to earn a return below the average historical real yield of 5.5% per year, but it could be that this lower return of, say, 4% would still be better than you can get anywhere else, and good enough for your saving objectives.

I think stocks will be lower sometime this year, but I may be wrong, and the above argument justifies hedging my bets by buying some stocks now. The actual returns depend on many things, of course. In the case of Heinz I expect a small (currently 2%) inflation-adjusted return and hopefully some capital appreciation.