Wall Street loves a good story, on both the positive and negative sides. Right now, unfortunately, the story for Hormel Foods (HRL 1.23%) is a bad one. Which is why the stock has fallen roughly 35% from its 2022 high-water mark.
While the food maker is facing very real headwinds, it is highly likely that it will muddle through and continue to reward investors with strong dividend growth over time. Here's what you need to know and why you should probably buy the stock today.
Hormel's dividend growth has slowed down
Over the past decade, Hormel has increased its dividend at an annualized rate of roughly 12%. That's a pretty impressive number for a company in the consumer staples sector -- a category known for being slow growth but reliable. But its more recent dividend increases have been much less impressive.
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In 2022, the dividend was increased 6.1%. In 2023, it grew 5.7%. And the 2024 hike, assuming no further increases in the year (one increase is the norm), was just 2.7%.
So the dividend growth is slowing down. That's not a good sign, even though Hormel's board is still clearly focused on extending its impressive streak of 57 consecutive annual dividend increases. That, by the way, makes the food company a Dividend King.
You don't create a record like that by accident, and you don't hike a dividend for 57 years without muddling through some hard times along the way. Right now, unfortunately, is a hard time for Hormel. That's why dividend growth has been slowing and why the stock price has declined so far since peaking in 2022.
If you are a long-term dividend growth investor, however, this is probably a buying opportunity. Notably, the 3.2% dividend yield is near its highest point over the past three decades. But don't buy the stock without understanding the negatives.
Hormel has many problems
The post-pandemic spike in inflation is one of the biggest problems facing Hormel. As the company's costs increased, it tried to hike prices. That's exactly what all consumer staples companies do when faced with rising costs.
Hormel's price hikes weren't as well received as those of many of its peers, so the company's financial results suffered. Notably, earnings per share in 2023 fell to $1.45 from $1.82 in 2022. That's a sizable decline. Notably, the company's gross profit margin, after improving in fiscal 2022, dropped nearly 100 basis points in 2023, an indication of the headwinds Hormel was struggling through.
That wasn't all related to the pushback on the company's price increases. Another problem has been avian flu, which hurt supply in Hormel's turkey business. You can't sell turkey, or turkey-based products, if you don't have enough turkeys.
NYSE: HRL
Key Data Points
Then there's the $3.3 billion Planters Nuts acquisition, which was consummated right as that snack niche was hitting a soft patch. It isn't particularly inspiring to see Hormel ink its largest ever acquisition at what, in hindsight, looks like a bad time. And that's on top of the fact that Hormel bought Planters knowing full well that it needed substantial investment to turn the brand around.
Lastly, the company's business in China is still sluggish. That country, a key growth platform for Hormel, simply isn't generating the growth management had anticipated. There's nothing the company can do but wait for consumers to start buying its brands again.
There are silver linings on Hormel's many clouds
Individually, none of these problems are massive, and all of them are likely to resolve themselves given enough time. For example, consumers might be upset by price increases, but eventually they have little choice but to accept them. Notably, volumes increased across all segments of the business in the fiscal first quarter as management continues to focus on innovation to help justify price increases.
While Planters is getting off to a slow start, it is actually outperforming the broader nut space as the company introduces new flavors and upgrades its marketing. Avian flu is an ongoing problem that is not unique to Hormel, and history suggests it will get better... eventually. Meanwhile, despite this issue, Hormel grew turkey volumes in the fiscal first quarter, showing that it is still executing quite well in the turkey space.
Meanwhile, while growth in China is slow on the consumer side, it is starting to show some promise on the food-service side of the business. That hints that Hormel's future in China could be brightening.
The issue is that all of these problems are hitting the company at the same time. And that has some investors justifiably worried. Given that other food makers have been executing better, it makes sense that Wall Street is dropping Hormel in favor of other producers that are performing better right now.
Except that, given the stock's decline and the early signs of improvement in the business, this could be the right time to buy, not sell. Moreover, Hormel was forced to shelve important business modernization and streamlining efforts during the pandemic as it had to focus on dealing with snarled supply chains. It is restarting those efforts, which should further help to support improved margins and financial performance.
Think long term with Hormel
None of the issues is likely to derail the company over the long term. And while dividend growth has slowed, that's exactly what you would expect given the current situation. History suggests that Hormel will muddle through and eventually get back on track. When that happens, investors will likely reward the stock with a higher price, and dividend growth should pick back up again.
If you think in decades, buying now while Wall Street is so negative gives you a chance to pick up what might be best viewed as a fallen angel while it has a historically high yield.
To that end, Hormel reported solid fiscal first-quarter 2024 earnings despite the lingering headwinds, and the stock jumped sharply higher. That could just be a preview of what's to come for the shares if things continue to get better for this iconic food maker.
