You can't successfully time the market on an ongoing basis, so you have to be content with timing your investments about right. That's how I'm looking at my recent purchase of Hormel Foods (HRL), which fell right after I bought it at what I believed (and still believe) was an attractive price for a dividend growth stock. Here's why I still like it for the long term.
Hormell's dividend growth streak was no accident
I recently added to positions in Hormel, as noted, and Medtronic (MDT 0.89%). They both share a number of traits, despite being in vastly different industries. One of the most important to me is their long histories of annual dividend increases. Healthcare company Medtronic's streak is an incredible 45 years, while food maker Hormel's is even better at 57, making it a Dividend King.
Image source: Getty Images.
Such long streaks don't guarantee that dividends will continue to grow, but they do highlight companies that have long histories of success behind them. And it shows that the boards believe strongly in returning value to shareholders via reliable dividend payments. Simply put, you don't produce dividend streaks like these by accident.
Hormel's dividend yield is historically high
Buying any old company with a long history of dividend increases isn't a great plan if you tilt toward value investing, as I do. That's why I focus on companies that pass my first point and that are offering historically high dividend yields. Both Medtronic and Hormel fit this bill, with Hormel's nearly-2.8% yield hovering near levels that were seen during the Great Recession between 2007 and 2009.
The best part for investors looking at the stock right now is that a weak earnings report has pushed the stock down from where I bought it, so you can get an even more attractive price than I did.
HRL Dividend Yield data by YCharts
Hormel is growing the business
So far I've noted two stocks and I like them both, but I believe that Hormel has the better long-term growth prospects. The consumer staples sector is known for being slow and steady, but Hormel has some very attractive opportunities ahead of it. The list includes overseas expansion, a business that today only makes up around 6% of sales; growing its food service niche (about 30% of sales), which helps restaurants save time and money with pre-cooked meats; and building its brand portfolio in the domestic market (the rest of sales), with Planters representing the most recent acquisition.
Medtronic is a great company, but I just don't think it has the same level of growth ahead of it at this point. To put a number on the growth these two companies have achieved, over the past decade Hormel has increased its dividend at an annualized clip of 13%, while Medtronic's dividend grew at around 10% a year. Both are impressive, but a few percentage points a year add up over time. It is true that Hormel's dividend growth has slowed of late, but I believe it will pick up again.
Hormel does have some warts
All of that said, stocks get historically cheap for a reason, which was highlighted during Hormel's recent earnings report. It is facing down outsized inflation at the moment that's crimping its margins. It is also dealing with the impact of the avian flu, which is making life hard for its Jennie-O turkey business. And the Planter's brand has slowed down a little. However, inflation and avian flu are likely to be temporary headwinds. Hormel has dealt successfully with both before, and I believe it will do so again.
Planters is unfortunate but not shocking. When Hormel bought the brand it was with the understanding that it had been under-supported by its previous owner (which is basically why Hormel wanted it). Hormel is putting in the time and money to revive the brand, something management has done before with other acquisitions, and it will take some time to see sustained results. I'm not worried at this point -- these are just the problems that have put the company on the sale rack. I believe the company can handle these issues even as it executes on the growth opportunities it has over the long term.
Hold your nose and consider buying
In hindsight, my timing on my purchase of Hormel wasn't great. But I can't predict the future. I'm still confident that, over the long haul, this dividend-growth-oriented consumer staples giant will reward me well. Sure, the near term is going to be a bit difficult to watch, but I knew that going in. And the troubles it faces are why the stock's yield is historically high. If you can handle a little uncertainty, Hormel stock looks very attractive. (Medtronic might be a strong alternative if you prefer a company that appears a bit further down the road to recovery.)
