Discounts on businesses with a leadership position in a recession-proof industry do not come around very often. However, this is precisely the case with The Hershey Company (HSY -0.53%). The iconic American company famous for its Hershey's, Reese's, Kisses, Cadbury, and Twizzlers brands (along with about 95 more) has seen its stock drop around 23% since April.
But if one steps back and looks at the bigger picture, Hershey has three powerful business attributes proven to give stocks market-beating potential over the long term:
- A top-tier return on invested capital (ROIC)
- A well-funded dividend that grows annually
- The strongest brand in its industry
Led by these potentially outperforming indicators -- and a recently discounted valuation -- here's why Hershey looks like an incredible foundational stock for your portfolio today.
Best-in-class profitability
Home to over 100 brands sold in 80 countries, Hershey has a proven track record of generating healthy returns on invested capital as it expanded across the United States in its younger years and globally more recently. With an ROIC consistently above its most similar peers, the company offers top-tier profitability.
HSY Return on Invested Capital data by YCharts
ROIC is a critical metric for investors to watch with more mature companies as it measures a company's profitability compared to its debt and equity -- the higher the figure, the better. A high ROIC signals that a company is very good at generating net income from the capital it puts to work on new investments, such as acquisitions or expanded manufacturing capacity.
What makes high ROICs exciting is that stocks in the top quintile (20%) of this metric compared to their peers are proven to outperform over the long haul. With Hershey's ROIC ranking as the fifth best of the 38 consumer defensive stocks in the S&P 500 index, history suggests the company is well-positioned to beat the market if it continues firing on all cylinders.
13 consecutive years of dividend increases
Further fueling the outperformance potential for Hershey investors is the company's well-funded and consistently growing 2% dividend. Equaling only 46% of the company's annual net income, Hershey's dividend has ample room for growth -- especially considering the confectioner's respective 5% and 12% annualized growth rates for sales and net income over the last decade.
While its dividend payments stalled out as a precautionary measure during the recession in 2009, Hershey has grown its dividend by over 3,000% since it was initiated in 1989. This incredible track record of annual dividend growth for Hershey is vital to investors since stocks that raise their payouts annually tend to outperform non-payers or dividend-cutters. A report from Hartford Funds showed that from 1973 to 2022, dividend growers and dividend initiators in the S&P 500 posted annualized total returns of 10.2% compared to a 7.7% return for the S&P 500 as a whole, equally weighted.
Best yet, management hopes to get its payout ratio back above 50% to reward shareholders. Announcing a 15% dividend increase during its second-quarter earnings, Hershey offers intriguing passive income potential at today's prices.
The most recognizable brand in U.S. chocolate
While a stellar ROIC and a history of dividend increases is excellent, it means nothing if it can't be sustained. That's where Hershey's brand power comes in. In an online brand awareness study by Statista in 2022, 92% of U.S. respondents said they recognized the Hershey name, which was good for first place among all of its peers.
This robust brand strength gives Hershey pricing power as its loyal customer base continues making repeat purchases at incrementally higher prices. This gives it a wide business moat in its niche of chocolates, sweets, and salty snacks.
Most important in Hershey's case, however, is that it is home to many brands still rising in popularity. First, Reese's has already successfully launched in the United Kingdom and is poised to enter the German, Australian, and Middle Eastern markets soon. Meanwhile, two of Hershey's recently acquired brands -- Skinny Pop Popcorn and Dot's Homestyle Pretzels -- were No. 1 in dollar growth and the fastest-growing U.S. pretzel brand over the last three years, respectively.
Why now?
Following its 23% drop in share price since April, Hershey has a price-to-earnings (P/E) ratio of 24, bringing it below its five-year average of 26.
HSY PE Ratio data by YCharts
Better yet, thanks to this decline, Hershey's dividend yield has finally grown to its highest mark since early 2021, indicating that buyers today receive more passive income potential for their buck.
Still only generating 9% of its revenue from its international operations, the company's global growth runway may prove that its valuation is too low today. With Hershey gradually snapping up brands such as Pelon Pelo Rico -- which is on its way to becoming Mexico's No. 1 spicy snack -- there is immense international growth potential remaining as the company learns about new markets.
With a best-in-class ROIC, a growing dividend, the most recognizable brand in U.S. chocolate, and a reasonable valuation, Hershey's is a premium bedrock stock to buy today and hold forever.
