Dividend Kings In Focus: Hormel Foods Corporation - Sure Dividend

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Dividend Kings In Focus: Hormel Foods Corporation

Updated on November 17th, 2021 by Bob Ciura

The Dividend Kings are the very best stocks in the market when it comes to returning cash to shareholders over time. To make the list, a company has to increase its per-share dividend for at least 50 consecutive years.

Given this extremely high bar, only the businesses that can show stability through all kinds of economic conditions make the cut.

Indeed, just 33 companies qualify as Dividend Kings. You can see all 33 Dividend Kings here.

You can also download an Excel spreadsheet with the full list of Dividend Kings (plus metrics that matter such as price-to-earnings ratios and dividend yields) by clicking on the link below:

Click here to download my Dividend Kings Excel Spreadsheet now. Keep reading this article to learn more.

Hormel Foods Corporation (HRL) is a processed food manufacturer that competes in several grocery categories. The company was founded 130 years ago, and has managed to increase its dividend for the past 55 years.

Hormel is a famously recession-resistant company, and performed relatively well during the coronavirus pandemic.

In this article, we’ll take a look at Hormel’s fundamentals to evaluate the attractiveness of the stock.

Business Overview

Hormel was founded in 1891. In the 130 years since, it has grown through organic expansion, and also with an extensive history of acquisitions and divestitures.

Today, the company produces almost $10 billion in annual revenue, with its core products remaining true to its history as a meat processor.

Hormel’s reach is expansive with distribution in 80 countries across the globe.

Source: Investor Presentation

Hormel has a staggering 40 product categories where its brands are first or second in terms of market share.

The company has focused on building scale and brand recognition in all of its categories, and over time it has paid off. This kind of dominance is difficult to find in any industry, but Hormel has managed to do it.

Hormel’s product’s are arranged in four categories: Refrigerated Foods, Center Store Foods, Jennie-O Turkey, and International.

Source: Investor Presentation

The Refrigerated Foods segment is fairly well diversified, with ~40% of revenue going to restaurants and food service customers.

The Jennie-O brand sells turkey products, with equal parts of revenue going to grocery and food service, respectively.

Growth Prospects

We currently expect Hormel to produce 5% annual earnings-per-share growth for the foreseeable future, as it continues to remake its portfolio to accelerate growth.

As mentioned above, the pandemic has actually been quite favorable for Hormel given its products are staples, and that it sells a wide variety of shelf-stable food products. These tend to be very affordable and they last for a long time.

In addition, Hormel has been very busy remaking its portfolio through acquisitions and divestitures in recent years.

For example, in 2021 Hormel announced the acquisition of the Planters snack nuts business from Kraft-Heinz (KHC) for $3.35 billion. Hormel expects the acquisition will boost its growth.

Source: Investor Presentation

We therefore see top line growth as the primary driver of earnings expansion in the years to come, as margin growth has been tough to come by for Hormel.

Hormel reported third quarter earnings on September 2nd, 2021. Revenue hit a record of $2.9 billion and was slightly ahead of expectations. Total sales were up 20% yearoveryear, and on an organic basis, sales were up 14%.

Volume came to 1.2 billion pounds which was up 1%. On an organic basis, volume was down 2%, with the difference being acquisitions and divestitures.

Adjusted diluted earningspershare were 39 cents, up 5% yearoveryear. We now forecast $1.70 in earningspershare for this year.

Competitive Advantages & Recession Performance

Hormel’s competitive advantage is its 40+ products that are #1 or #2 in terms of market share in their respective categories.

Hormel competes very well in categories with stable demand and repeat purchases, as it only sells consumables.

Its distribution network that gets products to 80 countries means Hormel’s revenue stream is very well diversified.

Hormel’s recession record is fairly robust, having grown its earnings during and after the Great Recession:

Hormel saw a small decline during the initial downturn during the Great Recession, but posted huge earnings growth in 2009 and 2010.

The coronavirus pandemic was similar, as Hormel reaped the benefit of pantry-stocking around the world.

Therefore, Hormel remains a good choice for investors seeking defensive stocks for their dividend portfolio.

Valuation & Expected Returns

We expect Hormel will generate adjusted earnings-per-share of $1.70 for the current year. Therefore, the stock trades for a price-to-earnings ratio of 25.4, which is above our fair value P/E of 22.

That works out to a modest headwind to total returns over the next five years as the stock remains expensive. Given Hormel’s struggles with volume and margins, we believe investors are much more likely to reduce the earnings multiple than expand it further.

If the P/E declines from 25.4 to 22 over the next five years, annual shareholder returns would be reduced by 2.8% per year.

On a positive note, expected earnings-per-share growth of 5% and the 2.3% dividend yield will add to shareholder returns.

Overall, we see the potential for annual returns of 4.5% per year for Hormel stock. This is a good enough return to maintain a hold rating on Hormel, especially due to the company’s consistent dividend growth.

Indeed, the dividend is very safe, as Hormel has a projected dividend payout ratio of 58% for 2021. Therefore, the company should not have much trouble increasing the dividend each year going forward.

Final Thoughts

Hormel’s track record of earnings stability and dividend growth are difficult to match. The company has proven it can survive and thrive in a variety of conditions, including perhaps the most challenging conditions the economy has ever faced with the ongoing pandemic.

However, the stock appears to be overvalued right now, which limits its total return potential. We currently rate the stock as a hold for dividend growth investors, but it is not a buy right now due to valuation.

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