Hormel Foods (HRL 0.14%) owns well-known brands like Spam, Skippy, and Wholly Guacamole. It has increased its dividend annually for 57 consecutive years, making it a Dividend King, and the stock is down about 25% from its 2022 highs.
Despite that sizable drop, the dividend yield is only 2.7%, a scant 0.2 percentage points above the yield of the Consumer Staples Select Sector SPDR ETF. And yet dividend growth investors should still find this stock very attractive.
Why the drop?
Hormel sells branded food products, a fairly consistent and stable business over time. No company, however, goes through without facing some challenges along the way. Hormel has been suffering under a number of headwinds, some industry-wide and others of its own making. Many of its peers have been performing better lately -- which is the big-picture reason the stock is languishing.
Image source: Getty Images.
For example, inflation has been putting pressure on Hormel's profit margins. That's not unusual today in the sector, as every company is facing higher costs. But Hormel hasn't been able to push through price increases as easily as hoped.
In the fiscal second quarter of 2023, volumes fell 6% year over year as the company jacked up prices. For many companies, price increases have been enough to offset volume drops, but not for Hormel, which saw a top-line decline of 4% and an earnings-per-share drop of 17%. That's not a good result, and it makes sense that investors are worried.
Hormel is also feeling the hit from avian flu in the Jennie-O Turkey business. Simply put, it hasn't been able to source enough turkey to meet demand. That has resulted in weak results in a key division, and there's nothing Hormel can do about it, except hope for the avian flu to moderate and remain at low levels.
Then there's the company's acquisition of Planters. It is an iconic brand, but one that was neglected by its previous owner. Hormel is busy giving the brand some love, including updating packaging, advertising, and innovation efforts. These are largely upfront costs, with the effort only likely to benefit the brand in the future.
At this point, Hormel is still in the investment phase of the Planters turnaround effort.
It's cheap
So Hormel is struggling, and investors have noticed and pushed the share price lower. But don't forget: This is a Dividend King that has worked through periods of weakness before and not only survived, but thrived.
Given the history of success here, it seems appropriate to give management the benefit of the doubt.
Meanwhile, the 2.7% dividend yield is actually quite high, historically speaking, for Hormel. That suggests that the stock is relatively cheap today. It's also worth noting that the dividend was increased roughly 6% in January. The problems were well known at that point. Companies generally don't increase dividends if they don't believe the new level to be sustainable.
And a 6% dividend hike in the face of adversity is pretty compelling, noting that the 10-year annualized increase is roughly twice that level. If, perhaps when, performance improves, it is reasonable to expect dividend growth to pick up to an even more attractive level.
HRL PS Ratio data by YCharts
Meanwhile, the value pricing indicated by the historically high dividend yield is backed up by the price-to-sales (P/S) and price-to-earnings (P/E) ratios, which are both below their five-year averages. The P/S ratio is notably below its longer-term average, as the bottom two lines of the chart above highlight.
So this appears to be a reliable dividend growth stock that's fallen on hard times and that is being punished for it, potentially opening up an opportunity for long-term investors who can handle some near-term uncertainty.
Think in decades
Hormel doesn't make decisions with a 12-month horizon; it thinks longer-term than that. So should investors, as the company deals with problems that are more than likely short-term in nature. Wall Street is punishing the stock today, but will likely reward it when today's issues are in the past. If you are a dividend growth investor, now is the time to pick up Hormel.
