H. J. Heinz (NYSE:HNZ) is best known for its ketchup, but it manufactures a wide range of food products and claims to have 150 of the No. 1 or No. 2 brands worldwide. From frozen potatoes to soup and baby food, the company constantly realigns its portfolio of brands to compete better internationally.
Such recent action includes an 80% stake in Coniexpress S.A. Industrias Alimenticias, a leading Brazilian manufacturer of the Quero brand of tomato-based sauces, tomato paste, ketchup, condiments and vegetables. By becoming a controlling shareholder of a Brazilian company Heinz can leverage its product line and use the local distribution network to better position itself in Latin America’s most populous emerging market. There are similar moves in the Chinese market, as well as divestitures of slower growing brands.
Although the company had to cut its dividend in 2003 as part of a restructuring, management took it upon itself to increase the dividend as profitability returned. Now Heinz pays a quarterly dividend of 48 cents a share, which is higher than it paid investors before the time of the dividend cut. The increased profitability due to the numerous reorganizations of business lines in the past eight years suggests that this highest rate of quarterly dividend is sustainable, with a 59% payout ratio at last check.
While earnings have been stagnant overall due to continued restructuring in 2011, this is less relevant for income investors as they can participate in a company with serious upside exposure to growth in emerging markets. In the U.S., volumes fell 2.4% in the latest reported quarter and were down 4.9% in the Asia-Pacific region (due to troubles in Australia).
Still, sales volume jumped 5.6% in the rest of the world, clearly showing where the biggest potential lies. The company has been selling smaller packages of its favorite foods in the U.S. (and other developed markets), as penny-pinching consumers trade down toward private label goods; they still end up paying the same for good stuff, but when presented in smaller packages it looks cheaper.
This trend is likely to accelerate due to better demographics in emerging markets and faster GDP growth, which translates to faster rising incomes for emerging market consumers. China and India combined have 2.4 billion people, and many of them still live below the poverty line. As 8%-9% GDP growth in both countries translates into more people becoming middle class consumers, Heinz’ sales in emerging markets are likely to keep rising much faster than those in developed markets.
