Dividend Kings In Focus Part 21: Hormel Foods Corporation - Sure Dividend Sure Dividend

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Dividend Kings In Focus Part 21: Hormel Foods Corporation


Published on October 14th, 2020 by Josh Arnold

The Dividend Kings are the very best stocks in the market when it comes to returning cash to shareholders. 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 30 companies qualify as Dividend Kings. You can see all 30 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 129 years ago, and has managed to increase its dividend for the past 54 years.

Hormel’s growth stagnated somewhat in recent years, but the pandemic has seen a resurgence of grocery demand, which has benefited Hormel in a big way. 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 and in the nearly 130 years since, it has grown through organic expansion, but also 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, and it trades with a $27 billion market capitalization.

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. Retail makes up about a quarter, and Deli sales are 20%, with the balance being commodity sales. This segment is, by far, the largest in Hormel’s business.

Source: Investor presentation

Next up is Center Store, which is generally grocery items that do not require refrigeration. This is Hormel’s second-largest segment, at just under half the size of Refrigerated Foods.

Source: Investor presentation

Finally, the Jennie-O brand sells turkey products, with equal parts of revenue going to grocery and food service, respectively. This is Hormel’s smallest domestic segment (the International segment is the smallest) and the one that has experienced the most trouble with growth and profitability in the past.

Growth Prospects

We currently expect Hormel to produce 6% 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, which is a perfect combination under lockdown conditions, and where unemployment is elevated.

Hormel has numerous products that have shown enormous growth in recent months against the same period last year. We see this as a temporary tailwind, but one with the possibility for Hormel to gain incremental customers for the long term. This sort of revenue growth means new consumers are trying Hormel products, and some of that growth is almost certain to stick around into 2021 and beyond.

In addition, Hormel has been very busy remaking its portfolio through acquisitions and divestitures in recent years. 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. Still, with pandemic-related demand increases and acquisitions, we believe Hormel can hit 6% annual earnings-per-share growth.

Hormel reported third quarter earnings on August 25th, and results came in as expected on both revenue and profits.

Source: Investor presentation

Volumes rose in Q3 by 4%, as organic volume rose 3%, and the balance came from acquisitions. Organic revenue was up only 2%, however, as average pricing declined slightly.

Grocery Products revenue was up 7%, while Refrigerated Foods was up 5%, hitting $1.36 billion. Jennie-O reported another revenue decline, this time coming in at 4%. International revenue was up 2%, but at just $151 million of total revenue, the gain was too small to move the consolidated top line. Retail and food service revenue offset each other as retail was up, but food service was down.

Operating margins fell 70 basis points year-over-year, coming in at 10.5% of revenue. Earnings-per-share came to $0.37 on a diluted basis, flat to the same period a year ago. We maintain our estimate of $1.65 in earnings-per-share for 2020.

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. We expect the pandemic-driven recession to produce similar results, as Hormel is reaping the benefit of pantry-stocking around the world.

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

Valuation & Expected Returns

We expect essentially no total returns from Hormel in the coming years, not because of any fundamental weakness, but instead because the stock is quite overvalued at present. Shares trade for 30.7 times this year’s earnings estimate of $1.65, which is 146% of our fair value estimate, which is 21 times earnings.

Hormel’s valuation has soared during 2020, and we believe it needs to revert back to something closer to its normal historical range. The impact of valuation changes is expected to produce an annual headwind of 7.3% to total returns, nearly entirely offsetting projected 6% earnings growth and the 1.8% dividend yield.

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, shares have been bid up to the point where we believe they are quite overvalued.

Given this, and despite the company’s 54-year dividend increase streak, Hormel stock is overvalued. With just 0.4% projected total annual returns in the next five years, we rate the stock a sell. Investors should wait for a significantly lower share price before buying Hormel stock.

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