With the possibility of a recession still on the table in the next year, it would be wise for investors to pick quality dividend stocks. These resilient companies all have at least one factor in common: they sell essential products and/or services that have strong name recognition among consumers.
The Hershey Company (HSY 0.09%) arguably fits this profile. Here's why the stock is a sweet pick that should be on the radar of dividend growth investors.
Incredible fundamentals are driving robust growth
Hershey's $48 billion market capitalization earns it the distinction of being the second largest confectioner in the world behind Mondelez International's (MDLZ 1.40%) with its market cap of $89 billion. Hershey's market share is second in the U.S. snacking category and second to none in the U.S. confection category. These leading category positions are because of the company's world-renowned brands, such as the eponymous Hershey chocolate, Dot's Homestyle Pretzels, Twizzlers licorice, and Skinny Pop popcorn.
The Hershey, Pennsylvania-based consumer staple recorded $2.7 billion in consolidated net sales in its fourth quarter ended Dec. 31. This was up a whopping 14% over the year-ago period. What was behind the company's impressive top-line growth for the quarter?
Organic, constant currency sales surged 10.7% higher during the fourth quarter. This growth was primarily driven by price increases that were passed onto consumers, which contributed to an 8.5% rise in net sales. Due to the cravings that consumers have for the company's brands, higher prices were largely shrugged off. This led Hershey's product volumes to grow by 2.2% over the year-ago period.
Hershey's late 2021 acquisitions of two businesses -- Pretzels Inc. and Dot's Pretzels -- chipped in another 3.6% of net sales growth for the company. These positive factors were slightly offset by a 0.3% foreign currency translation headwind. This was the result of Hershey's presence in international markets and the U.S. dollar's best performance against other currencies since 2014.
The confectioner generated $2.02 in non-GAAP (adjusted) diluted earnings per share (EPS) in the fourth quarter, which was up 19.5% from a year ago. Because selling, marketing, and administrative expenses increased at a slower rate (11.5%) than net sales, Hershey's net margin expanded by 50 basis points over the year-ago period to 14.9%. Along with a 0.6% reduction in its diluted share count, this is how the company's adjusted diluted EPS growth exceeded net sales growth during the quarter.
Hershey has plenty of room to widen its salty snack product assortment and further strengthen its chocolate product lineup. That's precisely why analysts anticipate that the company's adjusted diluted EPS will compound by 9.6% annually through the next five years. For context, that is meaningfully higher than the confectioner industry average earnings growth projection of 7.7% annually.
Image source: Getty Images.
A compelling dividend growth story that's still being written
Hershey's 1.7% dividend yield is in line with the S&P 500 index's 1.7% yield. The stock won't knock your socks off a with high starting dividend income. But having hiked its quarterly dividend per share from $0.42 to $1.036 over the last 10 years, Hershey shines in the dividend growth department.
HSY Dividend data by YCharts.
With the dividend payout ratio registering at just above 45% in 2022, the company's dividend appears to be well covered by profits. This allows Hershey to retain the capital needed to improve its fundamentals even more by completing acquisitions and reducing debt. That's why I believe that double-digit annual dividend growth should persist over the medium term.
Hershey stock offers growth at a reasonable price
Few businesses can beat Hershey as it pertains to quality. The stock has gained 19% over the past year. Yet, the valuation doesn't look to be excessive at the current $240 share price.
Hershey's forward price-to-earnings ratio of 23.9 isn't much greater than the confectioners' industry average forward multiple of 21.1. Given the company's tremendous brand power and superior growth prospects, this is a well-deserved premium valuation. That's what makes the stock a buy for dividend growth investors.
