Hershey's (HSY 0.09%) makes sweets and Hormel Foods (HRL 1.05%) makes packaged meat products. Simple companies that are easy to grasp.
Not so fast. As an investor, there's a very important nuance that you need to understand about these two consumer products stocks. And there are good and bad things that come from that nuance. Because, as it turns out, investors like you may not be the most important stockholders in these two companies.
Here's what you need to understand about these two iconic names.
A key foundation of capitalism
Investing is an incredible wealth-building tool because you get to own little pieces of a company that, if you are careful and persistent, will grow in value over time. It's why famous investors like Warren Buffett suggest that you look at buying a stock as if you are buying an entire business. The long-term goal of investing is, at its core, to participate in a company's expansion over time. One of the important factors here is that you, the investor, have a say in the way a company is run because of the voting rights associated with the shares you own.
Image source: Getty Images.
But how important are those voting rights? Technically you are electing the board of directors, who then run the company on your behalf. You'll also get a say in some business practices, too, though often these are just advisory votes that show the board what investors want. The people that get put up for board seats are normally selected by the company's management, so you aren't getting as much say as you might think. (Sometimes dissident shareholders put up outsider candidates, but that's pretty infrequent.) So when you buy stock in a company you are, to some degree, trusting that the company has your best interests in mind.
However, in some unique instances that may not actually be the case. Specifically, roughly 48% of the outstanding shares of Hormel Foods are owned by the Hormel Foundation. It's a non-profit organization set up by the company's founders. The Hershey Trust, meanwhile, owns 99% of the class B shares of Hershey, giving it roughly 80% of the vote in matters that require both class A and class B shares to vote. In both of these cases, individual investors do not appear to be in the No. 1 slot with regard to corporate decision making.
The good and bad of these voting-rights arrangements
On the one hand, this looks pretty bad for the little guy. And in some ways, it has been. The dividends from Hershey and Hormel provide most of the funding for the respective non-profit entities involved, so they have a vested interest in keeping dividends flowing. On the surface, that sounds good for income-focused investors. However, the Hershey Trust has several times been accused of not-so-great things, like insider trading, corruption, and standing in the way of major corporate actions. The company is basically funding the activities behind those accusations. Thus, if you are a part-owner, you are potentially funding such shenanigans. (It's important to note that the accusations against the Hershey Trust are not accusations against Hershey the company.)
This relationship has had material implications for investors. In 2016, Mondelez International was interested in buying Hershey for $23 billion, causing a quick 17% price increase in the chocolate maker's stock. But any deal would have required the approval of the Hershey Trust. Since the Trust's main goal isn't to maximize shareholder returns but to support its ongoing philanthropic projects, it shouldn't be too surprising that this deal didn't come to pass. It basically didn't matter what smaller shareholders might have wanted -- it was just about what the Trust wanted.
The Hormel Foundation is a bit more open on this front, with one of its main goals being to ensure that Hormel remains a stand-alone company. So Hormel investors that are aware of the foundation know going in that a buyout isn't going to happen -- and that dividends will again always be an important part of the investment equation, since they are what funds the foundation's philanthropic efforts. At the end of the day, that might be a worthwhile trade-off for some, so long as Hormel continues to operate its business well.
From a different angle, there's also the positive of knowing that by investing in Hormel and Hershey you are part of something bigger. The Hershey Trust and the Hormel Foundation have done great philanthropic things over time, including big commitments to education, while the companies are making money for investors. Although not a dollars-and-cents return, ESG-inclined investors might find the social aspect of these philanthropic relationships appealing.
A key factor? Maybe...
At the end of the day, there are good and bad things about Hershey's relationship with the Hershey Trust and Hormel's relationship with the Hormel Foundation. The big takeaway is that small investors basically take a backseat in both companies. However, if you understand that going in and have a handle on what it means for the companies and long-term investors, these unique relationships could actually be a desirable trait. If you want your shareholder vote to mean something, however, you'll probably want to avoid Hershey and Hormel.
