Quality businesses tend to deliver dividend growth in excess of inflation. This is because dividend growers often possess strong product brand portfolios or perform in-demand services that give them pricing power.
The Hershey Company's (HSY 0.60%) 15% hike in its quarterly dividend per share on July 28 to $1.036 was nearly double the 8.5% inflation rate in July. But after the stock's rallied 20% year to date, should investors still buy the confectioner? Let's dig into Hershey's fundamentals and valuation and see if we can get an answer.
NYSE: HSY
Key Data Points
A track record of beating the analyst consensus
A few weeks ago, the owner of the eponymous Hershey chocolate brand, Kit-Kat, and Reese's reported its financial results for the second quarter ended July 3.
The company generated $2.4 billion in net sales in the second quarter, which was a 19.3% year-over-year growth rate. Hershey's net sales were a bit above the average analyst net sales prediction of $2.3 billion for the quarter. This was the eighth quarter out of the past 10 quarters that the company exceeded the analyst consensus for net sales.
Millions of customers throughout the world rely on Hershey's products to meet their snacking preferences on a daily basis. This explains how the company's list price increases led net sales 9.5% higher year over year. Customers were largely willing to pay these elevated prices, which was reflected by a 4.6% growth rate in Hershey's volume. And the acquisitions of Dot's Pretzels and Lily's Sweets contributed to another 5.3% of net sales growth during the quarter. This was only partially offset by unfavorable foreign currency translation of 0.1% for the quarter.
Hershey recorded $1.80 in non-GAAP (adjusted) diluted earnings per share (EPS) in the second quarter, which equates to a 22.4% growth rate over the year-ago period. This came in higher than the $1.69 adjusted diluted EPS analyst estimate. How did Hershey top the analyst adjusted diluted EPS consensus for the ninth quarter out of the last 10 quarters?
Aside from the company's larger net sales base, its non-GAAP net margin edged up by 30 basis points year over year to 15.7% during the quarter. Combined with a 0.6% decline in Hershey's weighted-average diluted share count to 206.4 million, this is how the company's adjusted diluted EPS growth was greater than its net sales growth.
Image source: Getty Images.
The safest dividend is the one just raised
Hershey offers investors a 1.8% dividend yield, which is above the S&P 500 index's 1.5% dividend yield. And the recently bumped-up dividend appears to be quite safe.
That's because it is projected that Hershey's dividend payout ratio will be 47.2% in 2022. This should allow the dividend to grow in line with adjusted diluted EPS moving forward. Since analysts are predicting 10.4% annual adjusted diluted EPS for Hershey throughout the next five years, this should translate into double-digit dividend growth each year over the medium term.
Fully priced shares
Hershey's valuation doesn't look to be too much for investors seeking to start a small position in the inflation-resistant stock or to add a little to an existing position.
Hershey's forward price-to-earnings (P/E) ratio of 26.3 is moderately higher than the confectioner industry average forward P/E ratio of 22.5. However, the company's 10.4% annual earnings growth is significantly more than the 7.8% annual earnings growth forecast for the confectioner industry.
Hershey is a high-quality business worthy of investors' consideration.
