Updated on April 21st, 2021 by Bob Ciura
As the saying goes, slow and steady wins the race. This comes to mind when discussing the Dividend Aristocrats, a select group of just 65 companies in the S&P 500 Index, each with at least 25 consecutive years of dividend increases.
The Dividend Aristocrats are among the best stocks for investors looking to generate long-term wealth that can last for generations. With this in mind, we created a full list of all Dividend Aristocrats, along with relevant financial metrics such as price-to-earnings ratios.
You can download your full Dividend Aristocrats link by clicking on the link below:
Hormel Foods (HRL) is the very definition of a slow-and-steady stock. While it will not make investors rich overnight, it has steadily built wealth for its shareholders over many years.
Hormel operates in a stable industry, and has many strong brands. It has also rewarded shareholders with 55 consecutive years of rising dividends. Hormel has paid dividends for over 90 years in total.
Not only is Hormel a Dividend Aristocrat, it is a Dividend King as well thanks to its outstanding track record of returning cash to shareholders. The Dividend Kings have increased their dividends for 50+ consecutive years. You can see all the Dividend Kings here.
This article will discuss why Hormel is a high-quality dividend growth stock, and provide some perspective on the company’s growth and valuation outlook.
Business Overview
Hormel was formed all the way back in 1891, when George A. Hormel established the Geo. A. Hormel & Company in Austin, Minnesota. Consumers took a liking to Hormel’s fresh pork products, which were a novelty at the time. In 1926, the company produced the world’s first canned ham.
Hormel has continued to grow in the decades since, and now generates ~$10 billion in annual revenue. It has a diverse product portfolio today, spanning several categories. Some of its major brands include Skippy, Jennie-O, Spam, Hormel, and Dinty Moore. In recent years, it has added more natural products to compliment its processed offerings, such as Justin’s and Applegate.
Source: Investor Presentation
Hormel reported first quarter earnings on February 18th, 2021 with results coming in mostly in line with expectations. Total sales were up 3% year–over–year to a record of $2.5 billion. The gain was due to pricing and mix, which more than offset a –1% decline in volume. Diluted earnings–per–share fell –9% to $0.41 against the year–ago period.
We think Hormel is on track to slowly build revenue and margins moving forward thanks to improving volumes and a higher margin product portfolio.
Growth Prospects
Hormel has an extremely impressive history of generating consistent growth from year to year, regardless of the broader economic climate. This speaks to the company’s strong brands and its staying power during recessionary periods.
Hormel’s growth prospects depend upon a few different levers it can pull in the coming years. Organic growth is likely due to the company’s strong brands. In addition, Hormel has made a habit of buying its growth over the years through acquisitions.
The most recent example is Hormel’s $3.35 billion acquisition of the Planters snack nut portfolio from Kraft-Heinz (KHC). The acquisition fits perfectly into Hormel’s long-held acquisition strategy.
Source: Investor Presentation
The deal is expected to provide Hormel with a $560 million tax benefit, for a net price of $2.79 billion. The portfolio produced $1 billion in sales in 2020 and should reach Hormel’s long–term organic growth target.
Hormel expects Planters to be accretive from a margin perspective starting in 2022 and expects to see synergies of $50 million to $60 million annually to be realized by 2024. The transaction should close in Q2 of 2021. Hormel’s CEO said he was “increasingly optimistic” about generating sales and earnings growth this year and guided for $1.70 to $1.82 in earnings–per–share, which does not include the expected impact from the Planters acquisition.
All of these things should support earnings growth as they grow sales and/or margins, respectively, so we believe 4% annual growth to be quite reasonable, particularly if organic revenue growth picks up.
Competitive Advantages & Recession Performance
Hormel has a number of operational advantages. First, it operates in a wide variety of food businesses, which are very stable. Everyone has to eat, which provides the company with a certain level of demand, even during recessions.
In addition, Hormel’s products are affordable for everyone, so that stability should shine through during tough economic times.
In addition, Hormel has many strong brands, which give the company pricing power. In all, Hormel has the #1 or #2 position in over 40 of its brands.
Its popular products make it difficult for competing food companies to take market share. In fact, Hormel has been in that enviable leadership position for years, so it is certainly a lasting advantage.
Hormel’s competitive advantages provide the company with a recession-resistant business model. Hormel’s earnings-per-share during the Great Recession are below:
- 2007 earnings-per-share of $0.54
- 2008 earnings-per-share of $0.52 (3.7% decline)
- 2009 earnings-per-share of $0.63 (21% increase)
- 2010 earnings-per-share of $0.76 (21% increase)
As you can see, Hormel experienced a mild earnings decline in 2008, then racked up two consecutive years of 20%+ earnings growth. We expect Hormel to perform very well whenever the next recession strikes.
Valuation & Expected Returns
We expect Hormel to generate adjusted EPS of $1.75 for fiscal 2021. Based on this, the stock trades for a price-to-earnings ratio of 26.9. This is well above Hormel’s 10-year average price-to-earnings ratio. We view fair value for Hormel at a P/E of 22.
As a result, it appears Hormel is overvalued. If the P/E retraces to 22 over the next five years, it would reduce annual returns by 3.9% per year.
While the stock is not likely to see a higher valuation multiple, it can still generate somewhat positive returns from earnings growth and dividends. Including expected EPS growth of 5% and the 2.1% dividend yield, total returns are estimated at 3.2% per year.
The company’s dividend is very safe and will almost certainly continue to grow for many years, but given that the yield is roughly in line with the broader market and that the valuation is so high, we rate Hormel a sell.
We would be apt to upgrade Hormel to a hold or buy if the valuation weren’t so high, but until that happens, we recommend investors steer clear, even taking into account the improved growth trajectory.
Final Thoughts
Hormel has paid consecutive quarterly dividends without interruption since it became a public company in 1928. It has established one of the longest streaks of dividend increases in the market, and it is a Dividend King.
Consumer staples stocks, particularly food companies with strong brands, enjoy steady demand and pricing power. There is no question that Hormel has a strong business with a high-quality brand portfolio.
However, the stock is overvalued, meaning investors buying at this price level are likely to receive fairly weak returns. Even with projected EPS growth and dividends, overvaluation means the stock is pricing in too much growth today.