Now over 130 years old, Hormel Foods (HRL 0.14%) is an American institution. The company invented canned ham in 1926, and I personally celebrate its ingenuity by cracking open a can of Spam every time I go camping.
Of course, I pick up cans of Spam from the grocery store. And this is where consumers can find a variety of other Hormel products as well. The company has many well-known brands such as Jennie-O turkey products, Chi-Chi's salsas and sauces, Skippy peanut butter, and more.
These products resonate with shoppers. And indeed, retail sales are Hormel's largest source of revenue, accounting for 64% of its $12.1 billion in net sales during its fiscal 2023 (which ended in October).
However, Hormel surprisingly makes more profit outside of the grocery store than inside. And it's a big part of understanding whether this company would make a good investment today.
Where Hormel makes the most money
When reporting its numbers to investors, Hormel divides its business into three parts: retail, foodservice, and international. Grocery sales are handled in the retail category, and I've already explained how this generates the most net sales.
The second-most sales are surprisingly generated from foodservice. In this category, Hormel supplies ingredients for cooks at colleges, healthcare organizations, and restaurants. Its pizza toppings and deli meats are particularly popular. Moreover, within foodservice, the company also records sales from convenience stores.
During its fiscal 2023, Hormel had foodservice sales of $3.6 billion, which was just 30% of its total net sales. But it had foodservice profits of $596 million. That was 48% of its total profits, outpacing income from retail sales.
Hormel's profit margin on retail sales is just 7.5% compared with a 16.3% margin for foodservice sales -- that's quite a difference. Salty snacks make up a substantial part of the convenience store business. In 2021, the company acquired Planters from Kraft Heinz, giving it brands such as Corn Nuts, Planters nuts, and Cheese Balls.
According to management, sales in convenience stores are a $300 billion annual opportunity. And by acquiring Planters, the company achieved higher distribution in these stores. Now, its sales team is working to win more business with existing customers in the prepared-foods category because prepared foods are the top sales driver inside convenience stores.
In other words, there's good reason to believe that Hormel can find top-line growth. Its growth might just be more heavily concentrated in convenience stores rather than grocery stores because that's where it already has a foot in the door with Planters.
What it means for investors
Investors shouldn't expect Hormel to behave like a growth stock. This management team is focused on growing its profits so that it can continue to prioritize its dividend. For context, the company just increased its dividend for the 58th consecutive year, a rare feat that puts it in the company of Dividend Kings.
HRL dividend data by YCharts.
Management isn't about to relinquish its shiny dividend crown. But it needs earnings growth for dividend growth to be sustainable. Increases in foodservice can continue to help the company in this regard because margins are higher.
Between foodservice growth and other initiatives, management believes it can find $250 million in extra operating income in its fiscal 2026 compared to its fiscal 2022. That's plenty to keep its dividend streak going.
Hormel stock is presently in a slump and underperforming the S&P 500 by a wide margin. Historically, it's been closer to an average performer, and that might be a more realistic expectation. Therefore, the stock might not be a buy for all investors, many of whom want to outperform the market average.
That said, others might rightly see value in owning Hormel stock in a diversified portfolio. After all, many dividend payers produce positive returns and can be less volatile, which is important for some situations. Moreover, the company's impressive dividend streak is poised to continue, which should further help the stock rise over the long term.
