Mr. Market is a mercurial sort of fellow, prone to fits of euphoria and despair. This fictionalization of investors as a group, created by Benjamin Graham -- the man who helped train Warren Buffett -- is a helpful reminder that stock prices aren't always rational. Today, Mr. Market is particularly downbeat on Hormel Foods (HRL 1.31%), which is a great reason to consider buying it -- or, if you already own it, perhaps buy more. Here's what's going on.
The core business
Hormel is a brand manager, with leading names in product categories across the grocery store. Some of the names you may have heard of are Spam, Planters, Skippy, Columbus, and Wholly Guacamole. There are plenty more, including the company's namesake Hormel offerings. In addition to the grocery store, it also has exposure to convenience stores and the food service space.
Image source: Getty Images.
Notably, Hormel augmented its convenience offerings with the addition of Planters in 2021. That should allow it to push more of its other products into the space, creating a growth platform for the future. And its food service products are unique in that they are largely precooked meats. That helps restaurants having a hard time finding employees, or dealing with the cost of that effort, to keep the doors open with a light staff. In addition, the company is working to expand internationally, where it currently has limited exposure. There are, all told, plenty of reasons to like the long-term prospects here.
But there are some problems to consider today that have investors worried.
The big headwinds
Top of mind for most people right now is inflation. There's no way to avoid it; prices are rising fast for just about everything and it is impacting Hormel, which is paying more for ingredients, shipping, and its own employees. In the fiscal second quarter of 2022, Hormel's operating margin fell to 10.8% from 11.1% in the year-ago period. That's not a good thing, but it isn't something to get too upset about, either. In fact, Hormel has been passing rising costs on to customers via price hikes. It just takes time for these moves to work through the system. The food maker is a Dividend King, so it has survived inflationary periods before and not faltered in its commitment to shareholders. There's no reason to believe this time will be any different.
On top of the inflation issue, Hormel is also dealing with the impact of a rough avian flu season. Although so far in fiscal 2022 the Jennie-O group is doing fairly well, management noted in its earnings release that the "Jennie-O Turkey Store team is facing an uncertain period ahead." This was a notable reason for the company lowering the top end of its full-year earnings guidance range by $0.05 per share. That's not great news, of course, but Hormel maintained the low end, so it doesn't appear to be worried about business falling apart, just that it won't be quite as good as originally hoped. That's a logical assessment given the uncertainty inherent in an avian flu outbreak. But as with inflation, this, too, shall pass in time.
HRL Dividend Yield data by YCharts.
Investors have responded to these negatives by pushing the shares lower -- and, thus, the dividend yield higher, since price and yield move in opposite directions. Following the fiscal second-quarter results, Hormel's dividend yield is a historically enticing 2.3%.
No time like the present
Yes, times are tough right now, but they won't always be. Inflation will be dealt with like it has in the past: through price hikes. Margins will be crimped for a little bit while those hikes are pushed through, but there's no reason to fear a permanent impact. Avian flu is a similar story, with a near-term impact that is unlikely to last. So while things look dark today, it is very likely a temporary situation. Long-term investors looking for a strong dividend payer that seems historically cheap would do well to add to their investment in Hormel -- or, if you don't already own it, consider initiating a position.
