Hormel Foods (HRL -0.23%) has seen its stock price decline a whopping 25% over the past year. That doesn't exactly make it sound like a growth stock. But the thing to remember is that business performance is sometimes a sine curve, not a straight line. Sometimes the best time to buy a growth-oriented stock is when Wall Street is only seeing the bad news.
A long list of negatives
Hormel is facing a lot of problems today. One of the biggest is inflation, as costs head higher and put pressure on the company's margins. This isn't unique to the company, of course, but it still has to deal with the issue. The normal approach is to cut costs and raise prices. Hormel is doing both.
Image source: Getty Images.
However, the company's price increases have met with material consumer pushback. For example, in the fiscal first quarter of 2023, the food maker's sales fell 2% despite large price increases. That's because volume declined a painful 12%, more than offsetting the benefit of the price hikes. Competitors are faring much better.
That volume decline needs to be taken with a grain of salt. It was bad, there's no question. But the company was also impacted by the negative effects of avian flu on Hormel's Jennie-O Turkey business. This is another material headwind that Hormel is facing, and there is little it can do about the problem. While not exactly company specific, the avian flu is a problem that most other consumer staples companies don't have to deal with.
All in all, Hormel is clearly struggling, and investors reacted by selling the stock. That's hardly surprising, given that some peers have been doing fairly well in the current environment.
Don't write Hormel off
Companies sometimes go through extended periods of weakness. Hormel has proven itself over the long term. The best example of this can be found in its dividend, which has been increased annually for 57 years. That makes the company a highly elite Dividend King. You don't build a record like that by accident.
Equally important, the dividend has grown at a compound annual rate of 13% over the past decade. That's an impressive pace of dividend growth. That said, the most recent dividend increase was a far more modest 6% or so. That's still an attractive number, particularly given that the increase was made in the first quarter of 2023, as the company faced the headwinds noted above. So even at a difficult time, Hormel is providing investors with good dividend growth.
Meanwhile, Hormel has a solid financial foundation. Its debt-to-equity ratio is around 0.4 times. That's historically high for the company, thanks to a few recent acquisitions, but it is modest on an absolute basis and compared to many of its industry peers. That financial strength should provide the company with more than enough leeway to muddle through the current problems it faces.
That brings up the most attractive feature of Hormel today, its historically high dividend yield. At roughly 2.7%, income-focused investors might not be too interested in the stock. However, this is a growth and income play, given the historically rapid dividend growth. And when you consider the stock price pullback, that yield is also near its highest levels in history, suggesting it is on the sale rack. In fact, the yield hasn't been this high since the Great Recession.
A cheap growth stock
It can be hard to step in when others are selling, which is pretty much the story behind Hormel today. But if history is any guide, this historically well run food maker looks historically cheap today. There's little reason to doubt that it can handle the current problems and eventually, get back on the growth track. If you are looking for a reliable growth and income stock, this is the time to do a deep dive on Hormel.
