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Why It Might Not Make Sense To Buy Hormel Foods Corporation (NYSE:HRL) For Its Upcoming Dividend

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Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Hormel Foods Corporation (NYSE:HRL) is about to go ex-dividend in just 4 days. The ex-dividend date is one business day before a company's record date, which is the date on which the company determines which shareholders are entitled to receive a dividend. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. Meaning, you will need to purchase Hormel Foods' shares before the 14th of January to receive the dividend, which will be paid on the 15th of February.

The company's upcoming dividend is US$0.26 a share, following on from the last 12 months, when the company distributed a total of US$1.04 per share to shareholders. Looking at the last 12 months of distributions, Hormel Foods has a trailing yield of approximately 2.1% on its current stock price of $49.85. If you buy this business for its dividend, you should have an idea of whether Hormel Foods's dividend is reliable and sustainable. As a result, readers should always check whether Hormel Foods has been able to grow its dividends, or if the dividend might be cut.

See our latest analysis for Hormel Foods

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Hormel Foods paid out 58% of its earnings to investors last year, a normal payout level for most businesses. 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. Dividends consumed 68% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.

It's positive to see that Hormel Foods's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

historic-dividend
historic-dividend

Have Earnings And Dividends Been Growing?

Stocks with flat earnings can still be attractive dividend payers, but it is important to be more conservative with your approach and demand a greater margin for safety when it comes to dividend sustainability. If earnings fall far enough, the company could be forced to cut its dividend. That explains why we're not overly excited about Hormel Foods's flat earnings over the past five years. It's better than seeing them drop, certainly, but over the long term, all of the best dividend stocks are able to meaningfully grow their earnings per share.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Hormel Foods has delivered 15% dividend growth per year on average over the past 10 years.

The Bottom Line

Should investors buy Hormel Foods for the upcoming dividend? While earnings per share are flat, at least Hormel Foods has not committed itself to an unsustainable dividend, with its earnings and cashflow payout ratios within reasonable bounds. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

Ever wonder what the future holds for Hormel Foods? See what the 10 analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow

If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.