While U.S. gross domestic product growth of 3.2% in the third quarter was higher than the average analyst estimate of 2.9%, the economy could soon find itself in a recession. This is because of the lag between interest rate hikes from the Federal Reserve and declines in consumer demand. 

With the potential for a recession, consumer staple stocks are a sure bet amid an economic downturn because consumers can't live without food. And few consumer staples are as proven as Hormel Foods (HRL 0.61%). Let's take a look at why this Dividend King could be a smart buy for passive income investors.

Iconic brands produced strong growth last fiscal year

Hormel has come a long way since its founding in 1891. The Minnesota-based company boasts a portfolio of more than 40 brands that are ranked first or second in their categories and sold in over 80 countries around the world. These brands include the canned cooked pork brand known as Spam, the eponymous Hormel, Planters nuts, and the plant-based-proteins brand named Happy Little Plants. 

Hormel recorded a record $12.5 billion in net sales in its fiscal year ended Oct. 30. Putting this into perspective, the company's net sales surged 9.4% higher over the prior fiscal year. What was behind the large-cap consumer staple's robust top-line growth during its fiscal year 2022?

Hormel's organic net sales were up 6% year over year for the fiscal year. This is because, due to the power of the company's brands, its price hikes were only met with some pushback from consumers. Simply put, the price hikes were only partially offset by an 8.2% decline in organic volume over the year-ago period to 4.4 billion pounds in the fiscal year. Along with the contribution from the acquired Planters snack nuts business, this explains how Hormel's net sales grew at a solid clip during the fiscal year.

The company's non-GAAP (adjusted) diluted earnings per share (EPS) increased 5.2% year over year to $1.82 for the fiscal year. Due to higher costs of products sold and selling, general, and administrative expenses, Hormel's net margin dipped 30 basis points over the year-ago period to 8% in the fiscal year. Coupled with a 0.5% rise in the outstanding share count, this is why the company's adjusted diluted EPS growth rate was slower than the net sales growth rate during the fiscal year. 

As Hormel strengthens its product portfolio through acquisitions and new product launches in growing categories like plant-based foods, adjusted diluted EPS should grow as well. That's why analysts are anticipating 5.5% annual adjusted diluted EPS growth through the next five years. 

A person shops for groceries.

Image source: Getty Images.

Fill up your portfolio with a healthy serving of income

Stacked against the S&P 500 index's 1.7% dividend yield, Hormel's 2.4% yield is enough to satisfy the appetite of most income investors. And the Dividend King's dividend growth streak of 56 consecutive years looks like it is far from over. 

This is supported by a dividend payout ratio that will come in around 57% for fiscal year 2023. That manageable payout ratio helps Hormel to retain enough cash to execute bolt-on acquisitions and reduce debt to enhance the company's fundamentals. This is why I wouldn't be surprised to see annual dividend growth in the range of 6% to 7% moving forward. 

A valuation within reason

Hormel is a wonderful business. And yet, the valuation doesn't seem to be excessive.

The stock's forward price-to-earnings (P/E) ratio of 24.2 is only moderately above the S&P 500 consumer staples sector average forward P/E ratio of 21.3. That's hardly an unreasonable valuation for a steadily growing Dividend King, which is what makes Hormel a buy for income investors