A consistently rising payout is almost always indicative of a company that is steadily growing its revenue and profits. This is why a proven track record of dividend growth is an encouraging sign that a company is of the utmost quality.
Having just upped its quarterly dividend by 15.1% to $1.192 per share, The Hershey Company (HSY -0.53%) has earned a reputation of being a truly amazing business. Let's explore the company's fundamentals and valuation to learn what makes it an excellent buy for dividend growth investors now.
1. A not-so-secret ingredient: extraordinary brands
When most people think of Hershey, chocolate is probably the first thing that comes to mind. As the company holds the top U.S. market share in the chocolate category by virtue of brands such as Hershey, Kit-Kat, and Almond Joy, that's not surprising. But with acquisitions over the last several years like Dot's Homestyle Pretzels and SkinnyPop popcorn, the consumer staples company has also secured its No. 2 spot in the U.S. snacking category.
Hershey has reaped the benefits of this business strategy, reinvigorating its growth story in recent years. The company posted $2.5 billion in net sales for the second quarter (concluded July 2), which was up 5% over the year-ago period.
| Metric | Q2 2022 | Q2 2023 |
|---|---|---|
| Organic net sales growth rate (YOY) | 14.1% | 5% |
| Net margin | 15.7% | 16.6% |
Data source: Hershey. YOY = year over year.
Like most consumer staples companies, Hershey hiked its prices to stop rising costs in this inflationary environment from eating away at its profit margin. This helped to push the company's net sales higher by 7.7% in the second quarter. Because of the love for Hershey's brands, these increased prices largely didn't dissuade consumers from purchasing its products during the quarter. Sales volume dipped just 2.7% during the quarter, and that decline had more to do with summer promotions happening mostly in that period.
Hershey logged $2.01 in non-GAAP (adjusted) diluted earnings per share (EPS) for the second quarter, up 11.7% from the year-ago period. Thanks to careful cost management, the company's total cost of sales and selling, marketing, and administrative expense categories grew by just 0.7% during the quarter. This led to a sizable expansion in the company's net margin in the quarter. Coupled with a reduction in its share count from share repurchases, this is how Hershey's adjusted diluted EPS growth significantly outstripped net sales growth for the quarter.
New product launches, small acquisitions, and favorable pricing action all bode well for Hershey's growth outlook. This is why analysts believe that the company's adjusted diluted EPS will rise by 9.3% annually over the next five years. Put into perspective, that is superior to the confectioner industry average annual earnings growth projection of 8.8%.
Image source: Getty Images.
2. Dividend growth prospects remain appetizing
In comparison to the S&P 500 index's 1.5% dividend yield, Hershey's 1.8% yield is intriguing. This is especially the case when considering that since the quarterly dividend per share resumed growth following the Great Recession (it was frozen in 2008 and 2009), it has soared by 273%.
Strong dividend growth should be poised to continue. That's because with the dividend payout ratio set to clock in below 47% in 2023, Hershey is retaining enough capital to invest in growth opportunities, reduce debt, and execute share repurchases.
3. The valuation has sweetened in recent months
Despite its healthy fundamentals, Hershey's valuation premium relative to peers has mostly melted away as of late. Shares of the stock are down 14% in the past three months, which has arguably opened a compelling buying opportunity for dividend growth investors. Hershey's forward price-to-earnings ratio of 22.9 is barely above the confectioners industry average of 22.4.
All in all, Hershey shares look like a sweet deal for investors right now.
