Published by Bob Ciura on November 22nd, 2017
As the saying goes, slow and steady wins the race. This comes to mind when discussing the Dividend Aristocrats, a select group of 51 companies in the S&P 500 Index, with 25+ consecutive years of dividend increases.
Hormel Foods (HRL) is the very definition of a slow-and-steady stock. While it will not make investors rich overnight, it will steadily build wealth over many years.
Hormel operates in a stable industry, and has many strong brands that lead their respective categories. It has rewarded shareholders with 52 consecutive years of rising dividends.
Not only is Hormel a Dividend Aristocrat, it is a Dividend King as well. The Dividend Kings have increased their dividends for 50+ consecutive years. You can see all 22 Dividend Kings here.
This article will discuss why Hormel is a high-quality dividend growth stock.
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 more than $9 billion in annual revenue.
Source: 2017 Barclays Global Consumer Staples Conference, page 10
It has a diverse product portfolio today, across several categories. Some of its major brands include Skippy, Jennie-O, Spam, Hormel, and Dinty Moore.
This is a challenging time for Hormel, because the company’s large Jennie-O segment is under pressure. Record turkey production has caused significant price deflation.
Operating profit in the Jennie-O segment declined by 25% in fiscal 2017.
Source: 2017 Barclays Global Consumer Staples Conference, page 6
This dragged down the overall results. Total sales and earnings-per-share each declined 4% for the year.
The good news is, other categories have helped offset weak performance in turkey products. For example, Hormel increased operating profit in grocery products by 8% last year. Profit from international markets also increased 8% for the year.
Despite the short-term deterioration of the Jennie-O segment, Hormel’s long-term growth potential remains intact.
While 2017 was a difficult year, Hormel still has growth potential over the long-term. Commodity price fluctuations are often cyclical, and the company is growing across its other products.
Hormel’s growth is fueled by acquisitions. M&A has been the biggest contributor to Hormel’s growth over the past few years.
Source: 2017 Barclays Global Consumer Staples Conference, page 15
In 2013, Hormel acquired the Skippy peanut butter brand. In 2014, Hormel acquired CytoSport Holdings, maker of MuscleMilk, to diversify into nutritional products.
In 2015, Hormel acquired Applegate Farms for $775 million. Applegate produces natural and organic prepared meats, such as deli meat, bacon, and hot dogs. It is the number one brand in natural and organic meats.
Over the past year, the company has conducted additional bolt-on acquisitions. For example, Hormel acquired Fontanini Italian Meats and Sausages, to expand its refrigerated foods business.
Hormel also acquired Ceratti, a branded meats business in Brazil. This deal will spur further expansion in South America.
Acquiring Ceratti is also part of a broader push to expand in the international markets.
Source: 2017 Barclays Global Consumer Staples Conference, page 22
The most recent acquisition came on October 31st, when Hormel announced it will purchase Columbus Manufacturing, a premium deli meat and salami manufacturer. Hormel expects the acquisition to increase sales by approximately $300 million, along with a $0.02 to $0.03 per share boost to earnings-per-share.
For fiscal 2018, Hormel expects total sales of $9.40 billion to $9.80 billion. Earnings-per-share are expected in a range of $1.60 to $1.70 for the year. Compared with 2017, Hormel management expects sales and earnings-per-share to increase 4.3% and 5%, respectively.
Competitive Advantages & Recession Performance
Hormel has a number of operational advantages. First, it operates in food, which is a very stable industry. Everyone has to eat, which provides the company with a certain level of demand, even during recessions.
In addition, Hormel has many strong brands, which give the company pricing power. In all, Hormel has brands with the #1 or #2 position in over 35 product categories.
Its popular products make it difficult for competing food companies to take market share.
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.
Valuation & Expected Returns
Hormel expects earnings-per-share of $1.54 to $1.58 for fiscal 2017. At the midpoint of earnings guidance, the stock currently trades for a price-to-earnings ratio of 22. This is slightly above Hormel’s 10-year average price-to-earnings ratio of 18.
Source: Value Line
As a result, it does not appear that Hormel is significantly undervalued. The stock trades above its 10-year average, and earnings growth has slowed in recent years.
While the stock is not likely to see a higher valuation multiple, it can still generate positive returns from earnings growth and dividends.
The company expects 5% earnings growth this year. Long-term earnings growth could be slightly higher, if and when pricing deflation subsides.
A possible breakdown of future returns is as follows:
- 3%-4% organic revenue growth
- 0%-2% growth from margin improvements
- 1% growth from acquisitions
- 1% share repurchases
- 2.2% dividend yield
With mid-single digit earnings growth, total returns could reach approximately 7%-10% per year, including dividends.
This level of earnings growth seems achievable for Hormel, since it is a highly profitable company with strong brands. Hormel has seen challenges as of late, but in the past 10 years the company grew earnings-per-share by 11% per year.
Hormel’s dividend is highly secure, with room to grow. On November 20th, Hormel increased its annual dividend by 10%, to $0.75 per share. The annualized dividend payout rises to 2.2%.
Based on fiscal 2017 earnings-per-share of $1.57, Hormel has a dividend payout ratio of 48%. A payout ratio of less than half of earnings leaves room for continued dividend increases each year.
Hormel has paid 357 consecutive quarterly dividends without interruption. It has established one of the longest streaks of dividend increases, and is a Dividend King.
Consumer staples stocks, particularly food companies with strong brands, enjoy steady demand and pricing power.
Hormel is one of 350 dividend-paying stocks in the consumer staples sector. You can see the full list of all 350 consumer staples dividend stocks here.
Investors looking for stability and consistent dividend growth should give Hormel a closer look.