There's a saying that you shouldn't look a gift horse in the mouth, but on Wall Street, such gifts often come wrapped in ugly packages. It is often hard to buy at the best prices because fear is driving your emotional state. It's something that all investors have to contend with, which is why looking at a company's dividend yield relative to its own history can be such a powerful tool.
Here are three well-run companies that have terrible stories but historically high yields. If you buy them, which might involve closing your eyes and crossing your fingers (if not a quick rub of the old rabbit's foot), you could be setting yourself up for a lifetime of growing dividends.
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1. Hormel: This too shall pass
Hormel Foods (HRL 1.05%) has a dividend yield of roughly 1.9% today. Anything in the 2% area is at the high end of the historical range for this unique food company, which is focused on producing protein products. Meanwhile, the food maker has consistently increased its dividend annually for over five decades, making it a Dividend King with a compound annual dividend growth rate of just more than 10% over the past decade.
The biggest problem today is inflation, as input prices, labor, and transportation costs rise for Hormel and its peers. It is a material issue and one that investors should watch carefully, but inflation is a normal part of the packaged food business. Hormel will deal with it the same way it has many times before: by containing costs as best it can and raising prices. There's a mismatch in timing here, so margins will be under pressure for a bit. But over the long term, Hormel should be able to deal with this headwind pretty easily.
And, if you can stomach that near-term risk, you are getting a company with a great collection of brands (from SPAM to Planters) and a strong appetite for growth, including internal innovation, acquisitions, and spreading its wings globally. For dividend growth investors, this looks like an opportunity that shouldn't be missed.
2. Clorox: The other side of one-time gains
Clorox (CLX 0.24%) is similar to Hormel in that it provides the types of products consumers buy every day, only here they are consumer staples like bleach and plastic bags. The yield here is around 3.1%, following a nearly 40% price decline from peak levels seen in 2020. Like Hormel, the yield is toward the high end of the company's historical yield range.
The interesting thing here is the timing of the stock's high, which occurred in the early days of the coronavirus pandemic. This matters a lot.
One of the major product categories in Clorox's diverse, eclectic portfolio is cleaning products. Demand for these products soared early in the pandemic, so much so that management had to hire contract manufacturers to keep up with demand. Consumers are no longer buying with such gusto, leading to a 21% sales decline in the company's health and wellness division (where its cleaning products live) year over year in the fiscal second quarter. That's terrible, but not an unexpected reversion to the mean when you consider the pandemic uptick. The rest of the company's divisions saw sales flat to slightly higher.
Meanwhile, rising costs are being passed on to consumers over time, just like what's happening at Hormel. But as Clorox lets temporary contract manufacturing agreements lapse, it will see an additional benefit on the cost front.
It will probably take another four to six quarters to see meaningful improvement, but if you plan to own stocks for a decade or more, don't let this fallen angel slip by you. Clorox has increased its dividend annually for more than 40 years, putting it solidly in Dividend Aristocrat territory.
3. 3M: A legal hangover
As it turns out, 3M (MMM 0.86%) is probably even more diversified and eclectic than either Hormel or Clorox, only it operates in the industrial space (with a fair number of consumer products mixed in). The yield is around 4% today, which is toward the high side of its historical yield range. The dividend has been increased annually for over six decades, so it's another Dividend King. It is extremely well run, with a focus on internal research and development.
However, 3M is facing a series of potentially material lawsuits. They include environmental and product liability issues and, if the company loses, could add up to big financial losses. Management is doing its best to mitigate the headwind, working with regulators where appropriate and defending itself when it feels it is in the right.
It is hard to tell how all of this will work out, which has led to a material amount of uncertainty. Investors hate uncertainty, so the stock price has been weak, with recent recession fears likely adding more fuel to the fire. As an industrial, 3M's business tends to be cyclical.
At the end of the day, none of the concerns here are irrational. However, they are all likely to be either short-term in nature or something the company can muddle through in relative stride. Indeed, it has a massive $80 billion market cap and an investment-grade credit rating. So, for long-term investors, 3M's historically high yield should probably be seen as a buying opportunity, even if you need to hold your nose while you push the trade button.
Grin and bear it
To paraphrase Benjamin Graham, the man who helped train Warren Buffett, price is what you pay, and value is what you get. It's a way of saying that sometimes stocks are too expensive, and sometimes they are too cheap.
The problem, of course, is that great stocks rarely go on sale for no reason, which means you may have to look past current issues to see the long-term value in the company you are buying. Hormel, Clorox, and 3M all have problems to deal with and, based on their historical yield range, look cheap (for a reason) today. However, if history is any guide, their long-term value will shine through, and contrarian investors able to buy today will be well rewarded.
