Hormel Foods (HRL 0.14%) increased its dividend roughly 6% in the first quarter of 2023. That's important to note, because the company has been dealing with some headwinds over the past year or two, meaning 6% dividend growth was the figure during tough times. Over the past decade, that number was 13%. There's good reason to believe that dividend growth can pick back up again, making this stock a solid dividend growth buy right now.
The problems Hormel is facing
Before getting into the details of Hormel Foods' current headwinds, it's worth highlighting that the food maker is a Dividend King, with 57 consecutive annual dividend increases under its belt. This is not some fly by-night company, and it has successfully navigated through hard times before. While Mr. Market has gotten nervous, pushing the stock 20% below its 52-week high, if you think in decades and not days, this drawdown might actually be an investment opportunity. That said, the problems are real.
Image source: Getty Images.
Like all of the company's consumer-staples peers, Hormel is dealing with rising costs. There's a playbook for that, including cutting costs, adjusting package sizing, and raising prices. Some companies are achieving impressive success in offsetting the impact of inflation on their businesses. Hormel is not one of those companies.
In the first half of fiscal 2023, Hormel's sales fell 4% as higher prices resulted in a 6% volume decline. In other words, customers balked at paying more for Hormel's products. History suggests that consumers will eventually get used to higher prices and come back to the company's iconic brands, but nervous investors are clearly not willing to wait.
Hormel's Jennie-O Turkey business, meanwhile, is having a hard time supplying all of the turkey demand it's seeing. The problem is that avian flu is disrupting turkey availability, which is completely out of Hormel's control. Like inflation, this will pass in time. And, frankly, strong demand suggests that, when things do get better, Jennie-O will be in a good position to thrive.
The last big headwind is the company's Planters group. This was a recent acquisition that started off well but then sputtered as the nut category slowed down. Hormel has bought and sold a lot of brands, so it has a good handle on how to integrate a new business. And according to the company's fiscal second-quarter commentary, the Planters brand is "outpacing the packaged nuts and seeds category on a volume basis." That suggests that management is executing well in a difficult environment. It would be better if the brand was growing, but things might not be as bad as some on Wall Street fear. And, eventually, the nut category is likely to rebound.
The stock looks historically cheap
So if temporary issues are the problem facing Hormel today, what should a long-term dividend growth investor do about it? The answer comes down to valuation, with the stock looking like it's been placed in Wall Street's discount bin.
For starters, the dividend yield is around 2.7% today. While that's not exactly high on an absolute basis, it happens to be near the highest levels in the company's history. The last time it was up at these levels was during the Great Recession. If you like dividend growth stocks, Hormel seems to be quite attractive today from a yield perspective.
HRL Dividend Yield data by YCharts
Looking at more traditional valuation metrics, the price-to-sales, price-to-earnings, price-to-cash flow, and price-to-book value ratios are all below their five-year averages. The differences here aren't massive, so it wouldn't be fair to say that Hormel is trading at deeply discounted levels. But it's most certainly not a stock you would describe as expensive. Once again, if you like dividend growth stocks, it looks as though Hormel is attractively priced right now.
Give management the benefit of the doubt
Basically, Hormel is muddling through some difficulties that are most likely to be temporary. It has done the same before over the past 57 years. Mr. Market, however, isn't willing to wait for better days and is selling the shares, pushing them down to what appear to be pretty attractive valuations for a reliable dividend growth stock. That suggests that now is a good time to look at adding Hormel to your portfolio. Indeed, it's hard to complain when 6% dividend growth is what you get in a bad year.
