Hormel (HRL -0.93%) is one of the lowest-yielding stocks in my portfolio even though its dividend yield is historically high. In fact, the core reason I bought it was its impressive dividend growth. There's more to tell on that score, but the key takeaway is that I'm still in the green on the investment even though the yield is higher today than when I started acquiring it.
If you are looking for a consumer staples company, this would be my top pick today.
Dividends
Hormel has increased its dividend annually for 57 consecutive years, which makes it a highly elite Dividend King. The dividend yield today is around 2.7%. That's not huge on an absolute basis, but it is near the highest levels in the company's history. Using yield as a rough valuation tool, that suggests that Hormel is on the sale rack right now.
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But what really attracted me to Hormel was the strong historical dividend growth. Over the past decade, the dividend has increased at a compound annual rate of 13%. I tend to favor higher-yielding stocks with slower dividend growth rates, so I saw (and still see) Hormel as a way to add some inflation-fighting power to my portfolio. However, there's more to the story than just that.
The yield when I started buying was actually lower than it is today. But thanks to dividend growth and dividend reinvestment, I am still positive on the investment. This is because stocks tend to trade within yield ranges, so dividend increases generally lead to stock price increases as Wall Street adjusts to the higher dividend. It's kind of a virtuous cycle, and Hormel investors have remained winners even as the company has struggled.
The slow turn
Notably, the most recent dividend hike was roughly half of the 10-year average. Dividend increases go up and down over time, along with business performance, so that's an indication that times are tough today. And they are, though a company that rewards investors with a 6% dividend increase even during hard times is clearly making a statement about its belief in a brighter future.
Hormel's first-quarter 2023 earnings were not an easy read. Volume fell a massive 12%, more than offsetting the benefit of price increases. The top line fell 2% overall, with earnings per share down 9% year over year. Many of the company's peers are seeing more success as they pass rising costs on to consumers. And yet Hormel has lived through periods like this before, suggesting that it will eventually figure this headwind out this time, too.
That problem is an industry-wide issue, but Hormel is also facing two company-specific problems. First, the avian flu is holding back the company's Jennie-O Turkey business, which hasn't been able to get as much meat as it would like. That's bad, but as the avian flu subsides, it should be able to meet the strong demand for turkey and turn this business around. So there are silver linings on the dark clouds here.
The longer-term issue will likely be Planters, a recent acquisition. After a fairly strong start, this business isn't doing as well in early 2023. Category weakness in the nut space and production and timing issues are all factors. This was a large purchase for Hormel, so it needs to get the Planters turnaround back on track to assuage investors. But in fairness, the Planters brand wasn't well-supported by its prior owners, so Hormel bought it knowing there was a lot of work to be done.
Given the company's brand-management success, it is reasonable to give the company the benefit of the doubt, given that it is still early on in the turnaround effort.
Going back for more
I don't normally buy more of a company after I've made an initial investment. And to go back twice, as I have with Hormel, is highly unusual for me. But this combination of dividend growth, historically high yield, and well-run business is hard to find in any market. Sure, it is dealing with hard times, but every company does eventually, and Hormel has proven it can muddle through difficulties many times before. If you are looking for a great dividend stock right now, I'd recommend you look more closely at Hormel.
