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One Stock Consumers Love

By W.D. Crotty – Updated Nov 16, 2016 at 1:12PM

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Heinz tops the American Consumer Satisfaction survey once again.

Does consumer satisfaction matter in a stock's performance? The question crossed my mind Thursday morning, when Motley Fool Income Investor recommendation H.J. Heinz (NYSE:HNZ) announced that, for the sixth consecutive year, it is the top-rated food company in the University of Michigan's American Consumer Satisfaction Index (ACSI).

Well, the ACSI news didn't have much in the way of legs. Heinz stock opened up, but it then faded to negative territory right at lunchtime. There's irony in that timing.

Look at a chart of the company's performance over the last 10 years. In the irony of all ironies, Heinz's stock hit its all-time high of $58.81 seven years ago today. So, the six glory years of consumer satisfaction have not been able to jump-start this stock. In fact, the stock is a buck and change away from this year's 52-week low and is 40.1% lower than it was seven years ago today. Ouch!

Note to self: Using consumer satisfaction surveys is not a surefire way to find hot stocks.

While looking at Heinz, I wondered why it is an Income Investor newsletter selection. Obviously there's the 3.4% dividend, but the newsletter's goal is to benefit from stock appreciation and the dividend.

Heinz has been busy adjusting its product lines. For example, in 2002 it sold brands representing 20% of sales -- like Star-Kist Foods (Charlie the Tuna), 9Lives (Morris the Cat), and others -- to Del Monte Foods (NYSE:DLM). These slow growth vehicles, and $1 billion in debt, were weighing on a Heinz that wanted to grow more quickly. Recently, the company added HP Foods, with brands like Lea & Perrins Worcestershire Sauce, to its stable of products.

All this tweaking and adjusting of brands has produced one noticeable improvement. Free cash flow has grown from $752 million in fiscal 2003 (which ended in April 2003) to $920 million in fiscal 2005. That's $2.70 a share in free cash, and it prices the stock at a less-than-rich 13 times free cash.

Analysts expect the company to grow earnings at 7% annually for the next five years. That's in line with Heinz's recently stated goals. For comparison, analysts see 7% growth at Campbell Soup (NYSE:CPB) and a mere 5% at ConAgra (NYSE:CAG).

Income investors will also be glad to hear that Heinz expects to grow its dividend 4% to 6% annually. So the stock is priced on par with competitors on a PEG basis and sports a 3.4% dividend yield. That offers the potential for a nice return from a conservative stock. Now I know why Income Investor loves Heinz -- and it wasn't based on a consumer survey!

Are you looking for stocks with high dividends that are capable of both capital appreciation and dividend growth? If so, try a free trial subscription to The Motley Fool's Income Investor newsletter.

Fool contributor W.D. Crotty does not own any shares in the companies mentioned. Click here to see The Motley Fool's disclosure policy.

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Stocks Mentioned

Campbell Soup Company Stock Quote
Campbell Soup Company
CPB
$48.60 (-1.18%) $0.58
Conagra Brands, Inc. Stock Quote
Conagra Brands, Inc.
CAG
$34.35 (-1.18%) $0.41
Kraft Heinz Intermediate Corporation II Stock Quote
Kraft Heinz Intermediate Corporation II
HNZ

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