HJ Heinz: Dividend Dynamo or Blowup?

Dividend investing is a tried-and-true strategy for generating strong, steady returns in economies both good and bad. But as corporate America's slew of dividend cuts and suspensions over the past few years has demonstrated, it's not enough simply to buy a high yield. You also need to make sure those payouts are sustainable.

Let's examine how HJ Heinz (NYSE: HNZ  ) stacks up in four critical areas to determine whether it's a dividend dynamo or a disaster in the making.

1. Yield
First and foremost, dividend investors like a large yield. But if a yield gets too high, it may reflect investors' doubts about the payout's sustainability. If investors had confidence in the stock, they'd be buying it, driving up the share price and shrinking the yield.

Heinz yields 3.6% -- moderate and certainly not cause for alarm.

2. Payout ratio
The payout ratio might be the most important metric for judging dividend sustainability. It compares the amount of money a company pays out in dividends to the amount it generates. A ratio that's too high -- say, greater than 80% of earnings -- indicates that the company may be stretching to make payouts it can't afford.

Heinz's payout ratio is a moderate 62%.

3. Balance sheet
The best dividend payers have the financial fortitude to fund growth and respond to whatever the economy and competitors throw at them. The interest coverage ratio indicates whether a company is having trouble meeting its interest payments -- any ratio less than five is a warning sign. Meanwhile, the debt-to-equity ratio is a good measure of a company's total debt burden.

Let's examine how Heinz stacks up next to its peers:

Company

Debt-to-Equity Ratio

Interest Coverage

HJ Heinz

171%

        6 times
ConAgra (NYSE: CAG  )

70%

        6 times
McCormick (NYSE: MKC  )

62%

       11 times
Kraft (NYSE: KFT  )

80%

        4 times

Source: Capital IQ, a division of Standard & Poor's.

Heinz bears a fairly significant debt load.

4. Growth
A large dividend is nice; a large growing dividend is even better. To support a growing dividend, we also want to see earnings growth.

Over the past five years, Heinz has grown its earnings per share at an annual rate of 19% and its dividend at a rate of 8%.

The Foolish bottom line
Heinz exhibits a fairly strong dividend bill of health. Its debt may be a bit of a concern, but the company is likely counting on its stable and growing earnings power to support that leverage.

To stay up-to-speed on the top news and analysis on Heinz, or any other stock, simply click here to add it to your stock watchlist. If you don't have one yet, you can create a watchlist of your favorite stocks by clicking here.

Ilan Moscovitz doesn't own shares of any company mentioned. You can follow him on Twitter @TMFDada. Motley Fool newsletter services have recommended buying shares of McCormick and HJ Heinz. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 17, 2011, at 11:02 AM, kurtdabear wrote:

    In addition to its high debt/equity ratio, HNZ has negative net tangible asset value. It's selling at more than six times book value, and book value is all comprised of good will and intangibles.

    On top of that, approximately 1/3 of HNZ's long-term debt--nearly $1.5 billion--matures this year and must be refinanced.

    Finally, you have to ask why and how a mature consumer staples company has gotten itself so deeply in the hole despite great brands and a long history of profitability. One clue is that good will and intangibles rise almost every year. This is an indicator that restless management, bored with merely running an efficient company, is out buying growth instead of promoting organic growth. HNZ looks quite tempting, but it's not as sound as it appears, especially in a world awash in credit problems.

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