Hormel Foods Corporation (NYSE:HRL) is about to trade ex-dividend in the next four days. Ex-dividend means that investors that purchase the stock on or after the 16th of October will not receive this dividend, which will be paid on the 16th of November.
Hormel Foods's next dividend payment will be US$0.23 per share, and in the last 12 months, the company paid a total of US$0.93 per share. Last year's total dividend payments show that Hormel Foods has a trailing yield of 1.9% on the current share price of $48.96. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to investigate whether Hormel Foods can afford its dividend, and if the dividend could grow.
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Hormel Foods is paying out an acceptable 52% of its profit, a common payout level among most companies. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. It paid out more than half (55%) of its free cash flow in the past year, which is within an average range for most companies.
It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.
Have Earnings And Dividends Been Growing?
Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we're encouraged by the steady growth at Hormel Foods, with earnings per share up 8.7% on average over the last five years. While earnings have been growing at a credible rate, the company is paying out a majority of its earnings to shareholders. Therefore it's unlikely that the company will be able to reinvest heavily in its business, which could presage slower growth in the future.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Hormel Foods has delivered an average of 16% per year annual increase in its dividend, based on the past 10 years of dividend payments. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.
To Sum It Up
Is Hormel Foods worth buying for its dividend? Earnings per share have been growing modestly and Hormel Foods paid out a bit over half of its earnings and free cash flow last year. In summary, it's hard to get excited about Hormel Foods from a dividend perspective.
So if you want to do more digging on Hormel Foods, you'll find it worthwhile knowing the risks that this stock faces. For example, we've found 1 warning sign for Hormel Foods that we recommend you consider before investing in the business.
We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.
This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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