I'm a dividend investor, with a focus on buying companies trading with historically high dividend yields. Hormel Foods (HRL +1.07%), a company I've owned for many years, is incredibly attractive today. If I didn't already own it, it is the one stock I'd be looking to add even if a recession looms in the wings. Here's why.
1. Necessity business
Hormel sells branded food items to consumers and precooked meats to the food service space. We all need to eat, and this food maker is ready and able to help.
However, there are nuances here that are important. For example, on the consumer side of the business, Hormel owns iconic brands with leading positions, like Skippy, Planters, SPAM, and Wholly Guacamole. These are brands that consumers trust and often stick to even when times get tough.
Image source: Getty Images.
On the food service side of things, the company's products help save time and money. That becomes even more important during difficult economic periods. Hormel won't get through a recession unscathed, but it should be able to weather the storm reasonably well.
2. A rewarding history
One of the reasons to expect ongoing success even in the face of adversity is the company's incredible dividend-paying history. It has increased the annual payment for over 55 years, making Hormel a highly elite Dividend King. Think about that for a moment: This consumer staples company has increased its dividend since at least 1970.
The last bout of raging inflation, similar to what we're facing today, was in the 1970s and early 1980s. There have been multiple recessions, including the Great Recession, and bear markets, too. Hormel has withstood them all and kept on increasing its dividend. As a dividend investor, I find that a highly attractive attribute. Essentially, you don't build a dividend record like the one Hormel has by accident.
3. A rapid clip
The long string of dividend increases isn't the only attractive dividend story here. Over the past decade, Hormel's dividend has increased at an annualized rate of around 13%. That's a swift pace and one that has dual benefits.
First, my income stream has grown notably since I first bought the stock. Second, stocks often trade within yield ranges. That means that the stock has tracked the dividend increases higher over time, even though the dividend yield hasn't changed all that much.
To be fair, as the company deals with inflation and ongoing supply chain headwinds, I expect dividend growth to at least temporarily slow down. But even at a "slow" rate, the last increase was a pleasing 6%. It's hard to complain if that's what you get in a tough year.
4. Powerful friends
I own around 1,200 shares of Hormel, so I'm just a small fry in the grand scheme of things. However, I have a "friend" on my side here because the Hormel Foundation owns nearly 47% of the company's outstanding shares. This is a charitable foundation set up by Hormel's founding family, with the dual goals of donating money and ensuring that Hormel remains an independent company.
The key here, however, is that the Hormel Foundation basically wants exactly what I want -- a reliable, growing dividend (it's the foundation's main funding source). Hormel remaining independent is a part of that, but ensuring that the company sticks to a thoughtful and steady course is, too. While my input won't mean much to management, I'm glad to know that the Hormel Foundation's input will. Not many companies have this type of setup.
NYSE: HRL
Key Data Points
5. A strong base
Given point number four, it probably won't be too surprising to find out that Hormel has a rock-solid balance sheet. The company has earned an investment grade from the credit rating agencies. And its debt-to-equity ratio is a reasonable 0.4 times or so. That's actually up dramatically over the recent past, but it was driven by an acquisition.
It's normal for Hormel to buy something, pay down debt, and then look for something else to acquire. And, at 0.4 times, the debt-to-equity ratio, while high for Hormel, is not even close to a worrying level.
6. Right now
The most interesting thing about Hormel at the moment, however, is that the stock's roughly 2.4% dividend yield is at the high end of its historical range. That means that Hormel is likely on the sale rack. Sure, there are headwinds to deal with, but there's nothing today that suggests Hormel's long-term business is at a major risk. So, if you think in decades as I do, Hormel is fascinating today.
Take advantage of the market
Wall Street is rational over long periods of time, but over short periods, emotions often take control. That can lead to investment opportunities when fear drives people out of great stocks. In my eyes, that looks like what's happening to Hormel. In fact, having written this, I'm starting to think about adding more shares to my existing position.
