Nobody likes to overpay, which is why bargain hunting is so much fun. It's a joy to tell people about your great finds. When it comes to investing, taking a value bias can result in a lot more than bragging rights -- it can lead to big profits, too. If you are looking for income stocks that are cheap today, look no further than Hormel Foods (HRL 0.14%) and Enbridge (ENB -1.21%). Let's see why.
Hormel's headwinds are temporary
Nothing goes in a straight line, particularly when it comes to operating a business. And sometimes there's just no way to control the environment in which you operate. That's pretty much the story behind Hormel today. But the bad news has led the stock lower and pushed the yield toward historically high levels.
Image source: Getty Images.
So what's got investors so upset about a company that makes popular, everyday food items? First off, inflation has crimped Hormel's margins, leading to weak earnings. The company is doing what all food makers do in this situation: cutting costs and raising prices.
The problem is that consumers are pushing back hard on the price increases, with sales down 4% and volumes off by 6% in the second quarter. Competitors are doing better. And yet, if history is any guide, consumers will eventually get used to the new prices and return to the company's brands.
Another problem is avian flu, which has been making it difficult for Hormel to fill orders in its Jennie-O Turkey business. Avian flu comes and goes, so there's nothing to do but muddle through. But having more demand than the company can fill seems to speak to a strong business, not a weak one.
Lastly, Hormel's recent acquisition of Planters hasn't performed as well as expected. That, however, is largely tied to weakness in the nut category. Hormel's efforts to update the brand have resulted in volume trends that are ahead of the broader category. Basically, it is executing well, but in a tough market. Like the other problems outlined, this one should eventually get better, too.
The historically high yield of 2.7% from this Dividend King looks like a temporary opportunity to buy a company that makes products we all need. If you can be patient, acquiring the stock today could be very rewarding over the long term.
Enbridge's infrastructure is vital today and tomorrow
Canadian midstream giant Enbridge owns the energy infrastructure that helps move oil and natural gas around the world. Its customers pay the company a fee for the use of its asset, so energy prices aren't all that important to its financial results. Demand is the key driver.
Even during energy downturns, demand tends to remain fairly robust. It is a reliable business, which is how Enbridge has managed to increase its dividend each year for over a quarter of a century.
HRL Dividend Yield data by YCharts
The yield is a very attractive 7.3% today, and toward the high end of the company's historical yield range. One of the big problems is that Enbridge is projecting low-single-digit distributable cash-flow growth through 2025. That's not a great number, and it has investors downbeat about the stock. But management's long-term expectations are still for mid-single-digit growth, and there's no particular reason to doubt that it can get back to those levels.
In fact, the company is investing heavily in its business to keep distributable cash flow on an uptrend. Notably, that includes material spending on natural gas, a transition fuel for the world's push toward a lower carbon future, and clean energy. Comparatively little is being spent in the oil space.
Basically, Enbridge is using the cash flows from oil to help fund its own clean energy transition so it can adjust along with the world around it. And the company is paying investors a fat dividend while it prepares for the future. That sounds like a great plan that will pique investors' interest once growth starts to pick up again.
Finding diamonds in the rough
Looking for investment bargains generally means trolling through a list of stocks that have, well, blemishes. The key is to find the opportunities where the bruises seem likely to heal over time. Hormel and Enbridge are each dealing with near-term issues that are likely to be remedied in time. If you can be patient, these bargain dividend stocks could be big winners for you and your income portfolio.
