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Hormel: A Steady Dividend Stock for Uncertain Times

·7 min read
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The consumer staple sector is often full of names with long track records of dividend growth as companies in the space sell products that customers need regardless of the state of the economy. Its one reason why nearly a quarter of both the Dividend Aristocrats, those S&P 500 names with at least 25 consecutive years of dividend growth, and the Dividend Kings, those names with at least five decades of dividend growth, are in the consumer staples industry. These companies have proven successful at overcoming challenging economic conditions.

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  • High Yield Dividend Stocks in Gurus' Portfolio

  • NYSE:HRL). In order to have a dividend growth streak that numbers in the decades, a company must have a sound business model, reasonable payout ratios and further room to grow its distribution. Hormel checks all of these boxes.

    Company background and results history

    Hormel has been in business since the 1890s and has transformed over time into a leading provider of meat and food products. The companys brands include Hormel, SPAM and Jennie-O. Hormel has expanded beyond processed meat to include brands such as Skippy and Planters through acquisitions. The company has the first or second market share in 40 separate product categories. Hormel has a market capitalization approaching $25 billion and generates more than $11 billion in annual sales.

    Consumer staple companies typically have slow but steady growth rates. Hormel is no different as its revenue has a compound annual growth rate (CAGR) of 3.7% for the 2012 to 2021 period. Adjusted earnings per share have a CAGR of 4.9% over this same time frame, while net profit has increased nearly 7% per year since 2012.

    Unlike many companies that employ share repurchases to juice per-share results, Hormel has actually seen its share count rise by more than 16 million shares over the last decade. Yet, the company has still been able to extract more profit from its business as the net profit margin improved from 6.1% in 2012 to 8.0% last year, a nearly 200 basis points improvement.

    Hormels near-term performance has been very good. Second-quarter results beat estimates, with revenue growing 19% to a quarterly record $3.1 billion. This was the companys sixth consecutive quarter of record revenue. Earnings per share of 48 cents was a 14% increase from the prior year and 1 cent better than Wall Street analysts had expected.

    Volume did decline 2% to 1.2 billion pounds, but higher realized prices more than offset weaker demand. Supply chain constraints remained a challenge as well as higher input costs, but, so far, those issues have been made up for with price increases.

    Hormel reaffirmed its full-year sales guidance of $11.7 billion to $12.5 billion, which would be a 6.3% increase from the prior year at the midpoint. The company did lower its earnings per share forecast, with a new midpoint of $1.92, down from $1.95 previously. Still, achieving the midpoint would represent a nearly 16% improvement from the prior year.

    Recession performance and dividend growth history

    Hormel has raised its dividend for 56 consecutive years, which places the company among both the Dividend Aristocrats and the Dividend Kings.

    Hormels performance during the last recession was excellent compared to that of most other companies, which isnt surprising given the popularity of the companys brands. It is also a primary reason that the company has such a long dividend growth track record.

    Below are the companys adjusted earnings per share totals before, during and after the last recessionary period:

    • 2006 adjusted earnings per share: 51 cents

    • 2007 adjusted earnings per share: 54 cents (5.9% increase)

    • 2008 adjusted earnings per share: 52 cents (3.7% decrease)

    • 2009 adjusted earnings per share: 63 cents (21.2% increase)

    • 2010 adjusted earnings per share: 76 cents (20.6% increase)

    • 2011 adjusted earnings per share: 87 cents (14.5% increase)


    Hormels adjusted earnings per share grew almost 17% from 2007 to 2009 as the companys business continued to expand even as much of the market faced difficulty.

    The companys dividend continued to grow through this period, much like it has for almost six decades. Shareholders saw their payments increase close to 27% for the period.

    Hormels dividend has a CAGR of 14% over the last 10 years. The companys most recent increase raised the dividend 6.1% for the Feb. 15 payment.

    Hormels stock yields 2.3%, ahead of the average yield of 1.65% for the S&P 500 Index. The current yield is also better than the stocks 10-year average yield of 1.7%. Putting todays yield into context, the present yield would be Hormels highest yield since 2009 if it were to average it for an entire year. Hormel is simply providing more in the way of income than it typically does. Just as important as the amount of income is the likelihood that the dividend will continue to grow.

    Dividend payout ratios and the impact of debt on future dividend growth

    Besides a durable business model, Hormel has healthy payout ratios that allow for continued dividend growth.

    Hormel distributed 98 cents of dividends per share in fiscal year 2021. With the company earning $1.66 per share, the payout ratio was 59%. The company will distribute $1.03 of dividends per share for fiscal year 2022. Using estimates for the year, Hormel will have a payout ratio of 55%. Both payout ratios are higher than the 10-year average payout ratio of 41%, but not to the point where shareholders should be concerned with a dividend cut.

    Free cash flow shows a safe dividend as well. Hormel has paid out $539 million of dividends over the last year while generating free cash flow of $943 million for a payout ratio of 57%. This is nearly identical to the payout ratio of 59% that Hormel has averaged since fiscal year 2018.

    Now lets turn to debt obligations to determine dividend safety from that angle.

    Hormels interest expense has amounted to $57 million over the last four quarters. With total debt of $3.3 billion at the end of the most recent quarter, Hormel has a weighted average interest rate of just 1.7%.

    The chart below shows where Hormels weighted average interest rate would need to be before free cash flow wouldnt cover dividend payments.

    Hormel: A Steady Dividend Stock for Uncertain Times
    Hormel: A Steady Dividend Stock for Uncertain Times

    Source: Authors calculations

    As we can see, Hormels weighted average interest rate would need to reach almost 14%, from its current level of less than 2%, to be impactful on the companys ability to continue to pay its dividend.

    Valuation

    Hormel closed Tuesdays trading session at $45.31. Using the midpoint for updated guidance, the stock has a forward price-earnings ratio of 23.6. Hormel has often enjoyed a multiple in the low 20 times earnings over the last decade, with an average just north of 22 times earnings. On a historical basis, shares are slightly overvalued.

    The GF Value chart, a unique intrinsic value estimate from GuruFocus, shows Hormel to be modestly undervalued.

    Hormel: A Steady Dividend Stock for Uncertain Times
    Hormel: A Steady Dividend Stock for Uncertain Times

    Hormel has a GF Value of $58.26, implying a price-to-GF-Value ratio of 0.78. Reaching the GF Value would result in a 28.6% gain from the most recent closing price. Factor in the dividend and total returns could reach across the 30% threshold.

    Final thoughts

    Hormels business model has proven successful for more than a century. The company has a staggering market share in the areas that it competes and has augmented its core meat businesses with timely additions, such as Planters.

    Hormel has a dividend growth streak that is matched or exceeded by just a handful of companies, and the current yield is higher than usual. The dividend appears safe based on the payout ratio and debt obligations. At the same time, the stock is trading well below its GF Value.

    Markets continie to seesaw, but these factors suggest that Hormel could prove to be an excellent investment option for those looking for safe and secure income at a discount.

    This article first appeared on GuruFocus.