Heinz on a Roll

Ketchup king H.J. Heinz (NYSE: HNZ) just released its 2004 full-year results -- and they were sweet. Operating free cash flow, at $1.02 billion, came in 35% higher than the record set last year. Don't think for a moment it's been easy.

Heinz, General Mills (NYSE: GIS), Kellogg (NYSE: K), Kraft (NYSE: KFT), Minute Maid parent Coca-Cola (NYSE: KO), and Motley Fool Stock Advisor pick Krispy Kreme (NYSE: KKD) have all struggled with the Atkins and South Beach diet crazes. Heinz, at least, sees low-carb mania peaking in the next year, arguing that the latest diet books focus on calories, not carbohydrates. We'll see.

Ignoring carbs for a moment, Heinz has been shaping up its balance sheet and building cash. The cash conversion cycle -- the time it takes to make a sale and get that cash in-house -- declined from 75 days to 64 days. That is outstanding -- especially for a company Heinz's size. A 200 basis-point increase in return on invested capital (ROIC) further reflects that ability to manage cash.

Others, like Disney (NYSE: DIS), have improved cash flow by first reducing capital spending. The flaw in that is that effective capital spending ultimately results in cost savings, innovation, and capacity. Heinz, on the other hand, has achieved its free-cash-flow growth while increasing capital spending from 1.9% of sales last year to 2.9% this year.

While the long-term strategic plan ultimately calls for capital spending at 2.5% of sales, the plan for 2005 is to stay at the 3% level. If nothing else, Heinz's capital-spending program speaks volumes about the confidence this company has in its operations. And investors get something else of great value -- transparency. The company has a clearly articulated strategy plan and tracks its performance against it.

For all this, the stock trades at 16 times 2005 earnings guidance and yields 3.1%. As such, management's 5.5% to 10% annual earnings growth target makes Heinz a candidate for conservative portfolios. After all, if the low-carb craze is indeed peaking, Heinz should find the high end of its guidance within reach.

If you think a 3.1% yield sounds tasty, you'll love Motley Fool Income Investor . Don't take our word for it; take a free trial .

Fool contributor W.D. Crotty owns stock in Disney.