If I had to summarize my investment approach, it would be buying companies with strong dividend track records that currently have historically attractive yields. That's exactly what you'll find with Hormel Foods (HRL +1.37%) and The Hershey Company (HSY +0.04%), two consumer staples stocks I happily own and have added to multiple times despite the ongoing headwinds they're both facing. Here's why you might want to buy them, too.
Hormel is struggling
A company doesn't usually end up with a historically high yield for no reason. Given that Hormel's 3.6% dividend yield is near the highest levels in the company's history, you can assume that things are tough right now. There isn't one problem, however; there are many.
Hormel hasn't been able to push through inflation-driven price increases as well as peers have. It bought the Planters brand right as the nut category of the snack segment was starting to slow down. Avian flu has been an ongoing supply headwind for the company's turkey operations. And China has experienced a slow recovery from pandemic lockdowns.
Individually, these issues are all surmountable. But arriving all at once, they are a bit frightening, leading investors to dump the shares of this Dividend King.
However, time will likely heal all of these wounds. And Hormel has a strong balance sheet to sustain it while it works on resolving the problems. The debt-to-equity ratio is around 0.5 and it covers its trailing interest expenses by a robust 26 times. There's no imminent financial risk here. Plus, the dividend was increased again in the first quarter of 2024.
Longer-term, meanwhile, Hormel has a strong track record of innovation (which it is already putting to work at Planters) and it is expanding its business globally. It seems likely that Hormel will get through this rough patch while continuing to reward dividend investors.
NYSE: HRL
Key Data Points
Hershey's cocoa costs are skyrocketing
To be fair to Hershey, cocoa is just one ingredient that it uses, but it is the most important one with regard to chocolate. To put some numbers on that, the 52-week range for cocoa prices goes from the low end of $2,925 per metric ton to the high end of $11,722, with a recent price of around $9,330.
No wonder investors have been worried about the company, pushing the stock down by roughly 25% over the past year. The dividend yield is up to around 2.7%. The yield has been higher in the past, but it is still a fairly attractive yield for Hershey.
Notably, the dividend has risen steadily -- though not every year -- over time. For investors who are willing to take on some near-term uncertainty on the cost side of the business, this could be a good time to jump aboard. Hershey is a bit more aggressive with its balance sheet than Hormel, with a debt-to-equity ratio of roughly 1.3. But it covers its interest costs handily, with a times interest earned ratio of 16.
NYSE: HSY
Key Data Points
There is one other development that has investors worried: New weight loss drugs could impact demand for sweets. But it seems unlikely that consumers will stop indulging in chocolate anytime soon, and so far, there hasn't been a material impact from the drugs on Hershey's business.
Meanwhile, the company is expanding its healthier snack business (popcorn and pretzels) and pushing its best-known confection brands into foreign markets. So there are reasons to be positive about the future beyond Hershey's domestic chocolate operations.
It can be hard to step in when others are selling
There's no question that buying stocks other investors are selling is a tough thing to do, but that is often the time when you can find the best opportunities. Hormel and Hershey are currently unloved on Wall Street despite their still-strong businesses and long histories of success.
If history is any guide, the current headwinds these two consumer staples icons are facing are likely to be temporary. Once they sort out their problems, Hormel and Hershey will probably find favor with investors again.
