H.J. Heinz shareholders have a big payday coming if they approve the $72.50 per share offer Berkshire Hathaway and 3G Capital made earlier this year for the Pittsburgh food company.
But unlike other buyouts where sellers are offered a chance to exchange their shares for stock of the acquiring company, Heinz shareholders will have to find other ways to invest their proceeds. With the stock market near all-time highs and record low interest rates offering paltry yields, finding something to replace the ketchup maker in portfolios won't be easy.
"Where are you going to stick it? Cash is making nothing," said James Zalenka, a certified financial planner with Baran James in Scott.
First things first. Each Heinz shareholder is unique, so they should consider their age, investment objectives, tax situation, risk tolerance, the company's role in their portfolio and other factors before proceeding.
"It would be a pretty good time to look at your whole portfolio," said Pine money manager Ron Muhlenkamp, who runs the $440 million Muhlenkamp Fund [ticker: MUHLX]. "Take a fresh look at your overall approach and buy things that fill in holes left behind by Heinz."
Many investors will be looking for stocks with risk profiles and dividend yields similar to Heinz, which was yielding 3.4 percent before the buyout offer was disclosed Feb. 14. Mr. Muhlenkamp suggested: Pfizer [PFE], 3.3 percent yield; Johnson & Johnson [JNJ], 3 percent yield; DuPont [DD], 3.5 percent yield; Microsoft [MSFT], 3.2 percent yield; and General Electric [GE], 3.3 percent yield.
Another alternative, but not at its current price, is Kimberly-Clark [KMB], according to Charlie Smith of Fort Pitt Capital in Green Tree. Shares of the personal and health care product company yield 3.3 percent, but are trading near their all-time high, closing Friday at $99.31. Mr. Smith is looking to add to his firm's holdings in the $82-$85 per share range.
For a high-yield stock outside of the consumer products sector, David Root Jr. of D.B. Root & Co., Downtown, suggested Northwest Bancshares [NWBI]. Shares of the Warren, Pa., banker yield 3.9 percent and offer investors exposure to Marcellus Shale growth, he said.
Pittsburgh investment manager Jeff Mindlin suggested Icahn Enterprises [IEP], a limited partnership controlled by Carl Icahn that yields 7.3 percent. The partnership, much like Warren Buffett's Berkshire Hathaway [BRK/A or BRK/B], has stakes in a wide variety of businesses, including gaming, rail cars, metals and real estate. But Mr. Mindlin believes Mr. Icahn trumps his avuncular competitor when it comes to results. And when Mr. Icahn takes on management, he always looks out for shareholders, usually because he is one of the biggest investors involved in the fight.
"Everything he gets, everyone else is going to get," Mr. Mindlin said.
Icahn Enterprises closed Friday at $55.52. Mr. Mindlin suggested $40 to $44 as an entry point.
For those willing to forego hefty dividends in favor of capital appreciation, Mr. Smith recommended SanDisk [SNDK], a maker of flash memory cards for smartphones and corporate data servers, and Allergan [AGN], whose specialty health care products include Botox. Both are near their 52-week highs. Consider SanDisk under $50 and wait for Allergan to fall back to the $100 to $105 range, he advised.
Instead of buying shares of one company, investors could purchase baskets of consumer products stocks using mutual or exchange traded funds. Mr. Root said the Consumer Staples Select Sector SPDR [XLP], an ETF offered by State Street Global Advisors, would be "a reasonable replacement" for Heinz shares. He said an alternative is Vanguard's Consumer Staples ETF [VDC]. Both yield about 3 percent.
For those who prefer actively managed mutual funds over passively managed ETFs, Mr. Root suggested Federated Investors' Strategic Value Dividend Fund [SVAAX]. The fund also yields about 3 percent, but you'll pay a load -- or sales charge -- to purchase the fund's A shares. Mr. Zalenka suggested the no-load American Century Equity Income fund [TWEIX], currently yielding about 2.4 percent.
Heinz investors also have tax consequences to consider. Many will have to pay capital gains on their shares. They can offset those gains -- and limit their tax bill -- by pruning losing investments from their portfolios by the end of the year, said Joseph Nicola, a tax expert with Sisterson & Co., a Downtown accounting firm.
Mr. Nicola said some investors might consider gifting their shares, either to a child or a charity. But they should be aware there are consequences if you exceed federal gift tax limits. This year, those taxes kick in once you give more than $14,000 to the same individual, he said.
Should you give to a charity, you will be able to deduct the current market value of the Heinz stock that you donate rather than what you paid, Mr. Nicola said. There will be no capital gains taxes to pay, but that's because the money will no longer be yours.
If giving away your bonanza isn't your thing and you're looking to invest the proceeds, the best strategy may be waiting for the market correction that many professional investors expect.
"There's no reason why you have to invest right away," Mr. Mindlin said.
Len Boselovic: firstname.lastname@example.org or 412-263-1941.