Earnings are so variable that I've given up using any metric related to earnings per share as a valuation tool. Today I use price-to-sales or, my personal preference, historical dividend yield levels. Basically, when stocks like Hormel Foods (HRL 1.05%), Clorox (CLX 0.24%), or Unilever (UL 0.98%) have historically high yields, I go in for a deep dive. I think all three are worth owning today and here's why.
1. This too shall pass
Inflation is a theme that runs through all three of the consumer staples names on this list. For Hormel, which largely makes protein-focused food items like SPAM, Planters, and Jennie-O Turkey, the impact is just a timing issue. It has lived through inflation before without skipping a beat. The best evidence for that is its status as a Dividend King. However, it also has a great history of keeping the buying power of its dividends strong, noting that the annualized dividend growth rate over the past decade is a hefty 14%. So, if you are worried about inflation, you should probably look to buy Hormel, not sell it.
Image source: Getty Images.
Meanwhile, the avian flu has been a big problem of late, creating uncertainty in the company's Jennie-O division. Although this group has done well so far this fiscal year, the bird illness was one of the reasons why Hormel cut the top end of its full-year fiscal 2022 earnings guidance by a nickel. That led to a notable stock drop and pushed the yield up to 2.3%, historically high for Hormel. Like inflation, the bird flu is likely to be a temporary issue, and investors are getting overly worried about short-term troubles.
2. Working back from a big hit
Clorox was a market darling in the early days of the pandemic because of its cleaning products. But this segment of the business has actually complicated things in a bad way. When demand was high, Clorox inked manufacturing deals with outside companies so it could sell more. As demand has receded, just like management projected it would, its costs have ended up on the high side. Now add in the broader impact of inflation, and Clorox's margins have been under a lot of pressure. Fiscal second-quarter 2022 margins fell 12.4 percentage points year over year, which is pretty rough.
However, management is working on the issue, raising prices and exiting those high-cost contract manufacturing deals. In the fiscal third quarter, margins were down just 7.6% year over year. I wouldn't call that good, but it is moving in the right direction, just like the company said it would. It's going to take some time, but Clorox is likely to be just fine. Note, for example, that sales were actually higher year over year in most of its businesses in the third quarter. The lone weak spot was really the cleaning business, which is still finding a new level after the pandemic demand spike. But investors remain worried, and the stock has been weak, pushing the dividend yield up to 3.3%. That's pretty high for Clorox and makes it worth a closer look, even though a full margin recovery could be a year or two away.
3. A little help from a "friend"
The last name on my list is a stock that I just recently bought, Unilever. The current yield is a historically high 4.1%. This is probably the worst story of the bunch. Despite a host of iconic brands, like Dove and Hellmann's, Unilever has struggled to keep up with peers. And it has been going through something of a corporate overhaul. Things might be starting to look up.
The overhaul involved shifting from a dual listing to a single stock listing in the United Kingdom. With that came a new CEO, who wanted to make a splash and overstepped. Or at least that's what the market told him when it sold Unilever stock sharply on news of a potential acquisition. That deal was dropped, and at about the same time, an activist shareholder started to buy in. That investor, Nelson Peltz, is well known for having helped get Procter & Gamble back into growth mode. Peltz has since been given a seat on the board, including a stint on the compensation committee. While it is too soon to suggest that Unilever will follow in the footsteps of P&G, I believe it will, eventually, figure out a way to improve results. And while I wait for the iconic brand manager to figure that out, I'm happy collecting a fat quarterly dividend check.
Time arbitrage
Here's the thing with using relative dividend yield as an investment tool -- you have to be patient. You are, invariably, getting involved with fixer-uppers. By focusing on companies with historically strong underlying businesses, you reduce the risk of adverse outcomes. But short-term investors, like those who manage money for others, probably won't want to own ugly ducks like Hormel, Clorox, or Unilever.
However, one of the biggest benefits of being a small investor is that you don't have to worry about what anyone else thinks of your investing. You can happily sit back and collect historically high dividend checks while you wait for things to improve over time. Use that to your advantage while the so-called pros jump in and out of stocks trying to make each month or quarter look like a winner. Hormel, Clorox, and Unilever look like good income-producing time arbitrage opportunities today.
