It's an age-old business question: Should a business focus on what it's good at and accept some of the risk that comes along with focus, or should it branch out into many different specialties for the safety of diversity?
There's a solid argument for both sides. Diversity has certainly worked well for General Electric
Accompanied by a cute little line about its operational capabilities with leading-edge tomato technologies, Heinz announced today that it will shed its seafood, vegetable, and frozen-foods businesses in Europe, along with its Australian poultry company, and will focus on three of its product areas: ketchup, condiments, and sauces; meals and snacks; and infant nutrition. It's a logical decision, and it still leaves Heinz well-diversified across a number of different products.
The cash from the sales will be used to pay down debt and repurchase shares. And even though the sales mean that Heinz will report lower revenues and earnings in fiscal 2006, it appears that those earnings will be of a higher quality, given that the company expects both its gross margins and cash conversion cycle to improve. Since Heinz expects free cash flow to remain at about the current level, it is reasonable to assume that the current dividend is safe as well.
For dividend-oriented investors, the scorecard is a bit different. Companies can succeed with diversity or with focus, but they must have ample free cash flow to fund their dividends. For Heinz, this isn't a problem; it has plenty of free cash flow to go around. And with a little bit more focus, it's possible that the company's free cash flow may just grow a little bit faster.
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Nathan Parmelee has no financial interest in any of the companies mentioned. The Motley Fool has an ironclad disclosure policy.
