Inflation came in hot at 8.3% for the month of August, continuing a trend seen throughout this year. With prices spiraling upward, it's more important than ever to focus on companies with business models that can endure the difficult economic climate.
Everyone needs to eat. And this is the basic premise that gives consumer staples companies pricing power and the ability to make it through tough economic times. Best-known for such brands as Spam canned pork, Skippy peanut butter, and Planters nuts, Hormel Foods (HRL -0.93%) is a major player in this industry.
But is its stock a buy? Let's take a look at the company's fundamentals and valuation to decide if Hormel could be a nutritious addition to an income investor's portfolio.
Making its mark in the protein section
Hormel is well-known for its protein-based products. The company's growth strategy is to strengthen its position as a leader in this category by appealing to a wider range of customers.
It already has meat-based protein brands, such as Spam, that appeal to customers. But until it launched its Happy Little Plants brand in 2019, Hormel didn't have a protein-based brand for customers who follow a strictly plant-based diet.
Now, it has all kinds of plant-based items -- including sausages, meatballs, and pepperoni -- and the company is poised to seize market share in a plant-based food market that is expected to be worth $74.2 billion by 2027.
Steadily growing revenue and earnings
At the start of September, Hormel released its financial results for the third quarter (ended July 31). What did the company dish up for shareholders? It recorded $3 billion in net sales, which was 6% higher year over year.
Hormel's total volumes were down 9% over the year-ago period. But the company reported a 15% uptick in grocery products volume, stemming from strong demand across its Mexican and simple meals portfolios as well as the Planters acquisition. However, this wasn't enough to completely offset double-digit volume declines in the refrigerated foods segment, Jennie-O Turkey Store segment, and the international & other segment.
Hormel's more lucrative food-service business (covering restaurants and other establishments outside the home) grew net sales by 14% year over year during the quarter -- a faster rate than its retail and international businesses. This, along with price hikes on many of its products, led to the 6% net sales growth.
On the bottom line, the company generated $0.40 in non-GAAP (adjusted) diluted earnings per share (EPS) for the quarter, up 2.6% from the year-ago period. Higher commodity prices resulted in a 20 basis point drop in non-GAAP net margin to 7.2%. Paired with a 0.4% increase in Hormel's outstanding share count to 550.2 million, this explains how earnings lagged sales in the third quarter.
Looking ahead, analysts are more optimistic, anticipating an 8.8% adjusted diluted EPS growth rate over the next five years.
Image source: Getty Images.
A helping of immediate income and future growth
Compared to the S&P 500 index's 1.7% dividend yield, Hormel's 2.3% dividend yield is quite appetizing. And the dividend should keep growing at a healthy pace moving forward. That's because Hormel's dividend payout ratio comes out to 56% for this fiscal year. This allows the company to retain the capital necessary for debt repayment and strategic acquisitions to improve the business.
That's why I believe dividend growth will be in the high single digits annually over the next several years.
The valuation is rational
Hormel's valuation is also attractive. Its shares currently trade at a price-to-free-cash-flow ratio of 24, which is slightly below its 10-year median ratio of 26. For a business that looks to be at least as solid now as it was over the past 10 years, this is an attractive valuation for the Dividend King.
All in all, Hormel offers long-term investors a satisfying combination of income, value, and growth.
