I'm a conservative investor and I don't hit the buy button without a lengthy deliberation. In fact, I say "no" to investment ideas far more often than I say yes. But I recently added to my position in Hormel Foods (HRL 1.34%), even though I think the broader market is wildly overvalued. Here's why I made the move and why this is, literally, the only stock I've been willing to buy lately.
A rough gauge of value
I am a diehard dividend investor and have been for years. However, my dividend journey has taken me from looking at absolute yields (think buying mostly stocks with 10%+ yields) to a more nuanced approach that looks at yield in a relative way. Essentially, I first look for great dividend stocks regardless of their yield and then try to buy them when their yields are at the high side of their historical yield ranges. While price to earnings is a far more common valuation metric, relative dividend yield is my preferred method for identifying stocks that could be historically cheap.
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This is to help explain why Hormel, with a 2.1% dividend yield, is on my hot list. That yield may not be high on an absolute level, but compared to Hormel's own yield history it is pretty enticing. To be fair, another important piece of the puzzle here is dividend growth. Over the past decade Hormel's dividend has been increased at an annualized clip of around 15%.
So while a 2.1% dividend yield may not be much to write home about today, if it keeps growing at a rapid clip it will be far more enticing, based on my purchase price, pretty quickly. In fact, despite originally buying the stock a few years ago in the same yield range, I'm still up on my position because the price has risen along with the company's dividend increases.
To put a number on that, since I first bought shares in February 2017, the dividend has been increased five times. The quarterly payment is now nearly 53% more than what it was when I first added Hormel to my portfolio. And, despite the yield still being about the same as it was back then, the stock is up over 30%. That's the awesome power of dividend growth!
Why I couldn't resist Hormel
This is why, during a brief period of stock weakness recently, I added more shares. The stock has popped a little since that point, so I timed my purchase well, but that was pure luck. If I hadn't bought then, I'd still be thinking about doing it now. Hormel and industrial giant 3M have been competing for my investing attention of late, and Hormel won (or at least got the first round of cash, anyway -- 3M could be next pretty soon). However, the real story here is the company behind the yield.
For example, Hormel has an incredible portfolio of food brands, like SPAM, Columbus, and Skippy, that hold leading positions in their niches. And they span the grocery store, as well, so there's no one area that's overly important to its business, though protein in general is a core theme. In addition to this, the company sells prepared meat products to the foodservice space, using a direct sales force. So it is not solely reliant on at-home consumption of food.
The recent Planters acquisition, meanwhile, is expanding Hormel's reach in the convenience space, too, adding yet another avenue for growth that wasn't as prominent before. Also worth noting is that Hormel's foreign exposure is fairly limited, a fact that management is looking to change. All in all, Hormel has a lot going for it when you look at the long term.
And long term is the key here, noting that the dividend has been increased annually for 55 consecutive years. Hormel is, thus, a Dividend Aristocrat, which clearly demonstrates its commitment to shareholders even when times are tough. The last five decades have included such events as market downturns, recessions, inflation scares, and even the OPEC oil embargo.
Indeed, this company is pretty resilient, part of which comes from its strong balance sheet. Even after recently buying Planters, for example, Hormel's debt to equity ratio is a reasonable 0.5 times or so. Peers Kellogg (K +0.00%) and General Mills (GIS 1.52%) are at more than twice that level. In other words, Hormel shouldn't have too much trouble coming up with the cash it needs to take advantage of the opportunities that lie ahead of it.
This food stock should be on your short list
At the end of the day, I recently bought more Hormel, so I wouldn't buy it again just now. But the fact that I did just buy more of it means I think it is worth owning at current prices. If you want to buy a well-diversified and unique food stock that looks like it's attractively priced right now, Hormel is a great name to look at. It's probably the best option in the food space for dividend growth investors.
In fairness, I'm doing a deeper dive into 3M at the moment and it could be the leading candidate to get more of my cash in 2022, but that's only because I already bought more Hormel. That decision should tell you a lot about how much I like this food company.
