Making money in the stock market isn't hard -- there are hundreds of successful investing strategies out there. But ask any investor how to keep investors consistently safe and profitable, and it's a different game.
To find safe and profitable stocks that weather the storms that come and go through bull and bear markets, I look for high-quality investments with low volatility.
In this light, my favorite investments in today's market are stocks that steadily pay dividends.
When you buy a dividend-paying stock, you should be concerned about a company's expected growth and the stability of its dividend payments. I typically look for stocks that have a strong history of consistent dividend payments.
This requires looking at a company's earnings trends. As a company becomes more profitable, it increases the likelihood of paying -- and growing -- dividends.
In addition, the company should be safe. This means it should provide a recession-proof product or service. For example, consumer staples companies such as Kimberly-Clark Corp. (KMB) or Unilever (UN) are always safer picks than some riskier small caps or pharma stocks.
But one of my favorite sectors to find safe and steady dividend payers is the food industry.
Think about it, people need to eat no matter how the economy is doing.
And one of the most sought-after food products is meat. The demand for meat has been steadily increasing since 1960. In developing countries, meat consumption has been continuously increasing from a modest average annual per capita consumption of 10 kg (22 pounds) in the 1960s to 26 kg (57 pounds) in 2000 and will reach 37 kg (81 pounds) around the year 2030, according to Food and Agriculture Organization (FAO).
And of the meat companies, my favorite is a classic dividend stock -- Hormel Foods (HRL). The stock has consistently paid dividends for 47 consecutive years.
Investors who purchased $100,000 worth of the stock on Jan. 2, 1990, would have gained $2,910 annually with a yield of about 3%. This yield might have not meant much in 1990, but fast forward to today and you will be amazed at the compounding effect on the gains.
Take a look at the table below...
Today, the stock yields about half that. That's because as you probably know, as a stock's price rises, its yield falls. The stock has had significant growth, so its share price has risen dramatically to nearly $40. Despite a much larger annual dividend today (68 cents a share vs. 6.5 cents a share in 1990), its yield has fallen yet income has increased substantially.
Bond investors, however, enjoyed a steady 8% income for 23 years, but they were shocked when they had to renew their investment at a measly 2.7% after 20 years.
Take a look at the stock's nice 177% run since 2006…
Hormel is a leader in its industry because it trumps the competition by selling value-added meat products, as opposed to distributing solely raw meats and other commodities. Hormel's notable brands include Spam, Jennie-O, Country Crock, Lloyd's and Chi-Chi's.
Here are a four other reasons I like the stock…
It focuses primarily on convenient products, which are in high demand today with so many people on the run. This should be a growth opportunity for Hormel as more people are eating meals at home and looking for time-saving meal options.
2. SuccessfulIn January, Hormel purchased Skippy -- the 81-year-old peanut butter maker -- from Unilever for about $700 million. This should allow Hormel to expand its brand across the globe further, as Skippy is sold in more than 30 countries.
3. Lean supply chain
Hormel has a strong, vertically integrated supply chain that takes advantage of economies of scale. This keeps new competitors from eating into Hormel's current market share. For example, Hormel raises about 70% of the turkeys needed to meet sales volume. This lowers its costs and allows it to have a competitive advantage.
4. Strong financials
Hormel's financial health is very impressive. At the end of 2012, its current and quick ratios were about 3 and 1.7, respectively. As a quick background, the current ratio is used to calculate the company's ability to payback its short-term liabilities (bills, debt, etc.) with its short-term assets. The higher the current ratio, the more capable the company is of paying back its obligations. The quick ratio shows a company's ability in quickly converting inventory into cash.
With EBITDA covering interest expense almost 70 times at the end of 2012, it looks like Hormel is in great shape for the future. Hormel's forward price-to-earnings (P/E) is low -- at roughly 17, compared to the industry average of 27.
In addition, Hormel's operating margins should continue to average around 10% during the next few years as a result of its recent success in generating cost savings throughout the supply chain.
Risks to Consider: As the food industry becomes more competitive, Hormel has been forced to allocate a great deal of spending on product innovation and marketing support, which could lessen profitability and squeeze margins in the future. Also, surging commodity prices for soybean and corn could dramatically increase Hormel's feed costs, which would pressure margins. In this slow-growth economy, retailers have more negotiating power, making it more difficult for Hormel to raise prices.
Action to Take --> Hormel Foods is a good buy up to $42 a share. With a current dividend of 1.6%, investors should be able to count on consistent income as it has raised its dividend each year since 1967. The company is still well positioned to continue its impressive 15% annualized growth rate.
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- Investment & Company Information
- Hormel Foods