After a steep sell-off last year, the S&P 500 index has edged 5% higher year to date. But not all stocks have fared as well so far in 2023.
Shares of the consumer staple company Hormel Foods (HRL) have shed 15% of their value thus far for the year. With the stock so beaten down in recent months, it's worth asking: Should passive income investors buy the Dividend King for their portfolios? Let's look at Hormel's fundamentals and valuation to get an answer.
Well-known brands bode well for future growth
Hormel's products are widely recognized in more than 80 countries. More than 40 of the company's brands are ranked No. 1 or No. 2 in their respective categories, which is a testament to the brand power of Hormel's product portfolio.
In recent years, Hormel demonstrated its commitment to providing healthier and more nutritious options to consumers through acquisitions and new product launches. The company acquired the organic meat brand Applegate in 2015 and launched the lean protein and earthborn ingredients burger brand Hormel Fuse in 2014.
| Total Q1 2023 Product Volume Growth Rate |
|---|
| (11.8%) |
Hormel reported $3 billion in net sales during its first quarter ended Jan. 29, which was down 2.4% over the year-ago period. What was behind the slight dip in the top line in the quarter?
The company's volumes dropped sharply for the first quarter. This was partly due to the planned volume declines in commodity pork. The avian flu also challenged Hormel's turkey supply chain for its Jennie-O turkey brand, weighing on its sales during the quarter.
| Q1 2022 Net Profit Margin | Q1 2023 Net Profit Margin |
|---|---|
| 7.9% | 7.3% |
The consumer staple generated $0.40 in diluted earnings per share (EPS) in the first quarter. For context, this was a 9.1% year-over-year decline. Lower breast meat prices and historically high feed costs were largely to blame for the company's reduced profitability for the quarter. Along with a modest increase in the weighted-average diluted share count, this is how diluted EPS decreased at a faster pace than net sales during the quarter.
Hormel is poised to continue making moves to accommodate shifting consumer preferences as its near-term headwinds dissipate. This is why analysts believe its diluted EPS will grow at a mid-single-digit rate annually over the next five years.
Image source: Getty Images.
The market-topping dividend is well-covered
Hormel's 2.9% dividend yield is well above the S&P 500 index's 1.7% yield. And not only do income investors receive a heap of above-average income from the company, the Dividend King should be able to keep growing its payout moving forward.
This is because the dividend payout ratio is expected to be below 64% for the current fiscal year. Such a payout ratio leaves Hormel with more than enough capital to reinvest in its business and repay debt. That's why I would expect dividend hikes like the most recent around 6% over the medium term from the company.
A sensible valuation
Recent weakness in Hormel's share price seems to have created a buying opportunity. The stock's forward price-to-earnings (P/E) ratio of 22.4 is moderately above the S&P 500 index consumer staples sector average forward P/E ratio of 19.6. But considering Hormel's quality, this valuation is arguably within reason. That's why I believe the stock is a buy for dividend growth investors.
