Picking companies with brands that are household names around the world tends to work out well for investors over the long run. That is because legendary brands often come with a great deal of pricing power, which can boost net sales and profits over time.
The Hershey Company (HSY -0.53%) is a consumer staple whose name has long been well-recognized among consumers. How popular is it? A $10,000 investment made in the company 10 years ago would now be worth around $38,000 with dividends reinvested. That is significantly more than the $30,000 that the same investment amount in the S&P 500 index would have become during that time as of several weeks ago.
Let's dive into three reasons Hershey's stock could continue to outperform the broader market in the years ahead.
1. World-class brands are fueling incredible growth
It's a safe bet that most people have either heard of Hershey or consumed at least one of its products in their lifetime. Thanks to its eponymous Hershey's chocolate bars, Kit-Kat chocolate-covered wafer bars, and Reese's peanut butter cups, the company enjoys the No. 1 market share in the U.S. confection category. And due to its SkinnyPop popcorn and Dot's Homestyle Pretzels, among other munchables, Hershey also maintains the No. 2 market share in the U.S. snacking category.
The company reported $3 billion in net sales during the first quarter (ended April 2), which was 12.1% year-over-year growth. What factors contributed to Hershey's tremendous net sales growth in the quarter?
| Q1 2023 Organic Net Sales Growth Rate | Q1 2022 Organic Net Sales Growth Rate |
|---|---|
| 12.2% | 11.5% |
Data source: Hershey Q1 2023 earnings press release and Hershey Q1 2022 earnings press release.
In trying to keep up with higher costs, Hershey raised prices. This led to an 8.9% rise in its net sales for the first quarter. And because the company's products have become embedded in consumers' daily routines, these higher prices didn't seem to bother them at all. As a result, Hershey's organic volume grew by 3.3% during the quarter.
The company's volume gains were largely powered by market share gains in the U.S. candy, mint, and gum category, the ready-to-eat popcorn category, and the pretzel category. These growth catalysts were only partially offset by a 0.1% foreign currency translation headwind in the quarter. That was due to Hershey's global operations and recent strength observed in the U.S. dollar against its foreign currency counterparts.
| Q1 2023 Net Margin | Q1 2022 Net Margin |
|---|---|
| 20.4% | 19.6% |
Data source: Hershey Q1 2023 earnings press release.
The company's non-GAAP (adjusted) diluted earnings per share (EPS) surged 17% higher over the year-ago period to $2.96 for the first quarter. Slower growth in selling, marketing, and administrative expenses than in net sales propelled expansion in Hershey's net margin to 20.4% during the quarter. Improved profitability paired with a lower share count stemming from share repurchases explains how the company's adjusted diluted EPS compounded at a faster rate than net sales in the quarter.
As Hershey further strengthens its salty snack product lineup, the company should have a bright future. Analysts believe that Hershey's adjusted diluted EPS will increase by 9.4% annually through the next five years. Putting this into perspective, that growth outlook is better than the confectioner industry average annual earnings growth forecast of 8.9%.
Image source: Getty Images.
2. No sign of strong dividend growth ending anytime soon
At the surface level, Hershey's 1.5% dividend yield isn't especially appealing compared to the S&P 500 index's 1.6% yield. But a closer look reveals that this is more of a dividend growth stock than an immediate income stock: Hershey's quarterly dividend per share has rocketed upward by nearly 150% in the past 10 years.
HSY Dividend data by YCharts.
Fortunately, the company looks poised to continue this dividend growth. That's because the dividend payout ratio is positioned to clock in below 46% for the current fiscal year. This leaves Hershey with enough funds to make bolt-on acquisitions, repurchase shares, and repay debt.
3. Be ready to press the buy button on any future pullbacks
Shares of Hershey's stock have gained an astonishing 18% so far in 2023. Surprisingly, the valuation isn't prohibitively expensive after this rally.
Hershey's forward price-to-earnings (P/E) ratio of 26.6 is only moderately above the confectioner industry average forward P/E ratio of 24.1. Considering the company's considerable brand power and earnings growth potential, this is arguably a buyable valuation for dividend growth investors. That's why I plan on adding to my position in the stock on any pullbacks in the future.
