The stock of Hormel Foods (HRL 1.15%) is offering investors a 2.1% dividend yield, which is toward the high end of the company's long-term range. For those seeking a Dividend King with an incredible history of sizable annual dividend increases, now is the time to start looking at this food maker.
One potential negative regarding an investment in Hormel stock is that the company's first-quarter volumes were down, which means it was selling fewer goods. Only there's more to that story than meets the eye. Let me explain.
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A top-level view
Hormel's first-quarter results weren't bad. For example, the company posted record sales of $3 billion. Operating income was up 19% and earnings per share rose 7% year over year. Even volume was higher by 2%. Except that last figure isn't as clean as it looks, given that organic volume was off by 4%.
Part of the reason for the difference is the company's acquisition of the Planters nuts business. That boosted overall volumes because of the addition of new products to sell, but it wouldn't have an impact on organic volume because the deal wasn't closed until June of 2021.
Overall, it was a good acquisition, helping the company expand in the convenience sector while expanding its reach in other ways in the nut space, where it already competes via the Skippy and Justin's brands.
The added sales seem to be hiding sales weakness at the company's other divisions, but that's not quite the right way to view these divergent trends.
A shifting model
Hormel is probably best viewed as a brand manager that owns iconic names like Spam, Jenny-O, Skippy, Planters, and Wholly Guacamole, among many others. It has leading market-share positions throughout the grocery store. Only this is something of a modern view of the iconic food maker. Historically it was a meat producer that not only had branded products but also factories that handled processing livestock.
Processing livestock is different from selling branded products. The former tends to be a commodity-based business driven by supply and demand. The latter is higher margin because value is added via the brand identity and the final products into which commodity offerings are turned. Pre-cooked bacon, for example, is a premium product that can fetch high prices. But bacon only comes from one part of a hog (technically the side and the belly, which are different cut areas). The rest of the pig has to be used for other things, for example, Spam.
But there are cuts that Hormel doesn't use and that it would, historically anyway, have sold off at whatever price it could fetch. Meat is, at the end of the day, a commodity. Those meat sales supported organic volume, but they didn't add much value to Hormel's business.
So as its branded portfolio increased in scale, it made the decision to exit as much commodity-oriented business as possible. That's a process that has been ongoing over the past year or so in the hog space. This transition was responsible for virtually all of the organic sales drop in the company's refrigerated foods division.
The company has also started to work toward the same end in its Jenny-O turkey business. The current quarter's volume decline in this division was really the result of staffing shortages, but it, too, will start to show up as a volume headwind in the future as the company refocuses around value-added products. These are both strategic choices that will have a near-term impact on volumes but should position Hormel for better long-term performance thanks to higher margins.
An opportunity
Hormel is facing a number of headwinds along with its peers, most notably inflation. That means the need to pass higher costs on to consumers, which takes time and risks the loss of business if price increases are rushed.
Hormel's current volume declines, however, shouldn't be taken as a sign that the company is struggling in this effort. In fact, what is more likely is that it will come out of this inflationary period with an even stronger business because it is shedding the operations that are most volatile and have the lowest margins. The volume declines might look bad given the current industry backdrop, but they are actually a good thing.
