Hormel Foods Stock Delivers On Dividend Growth And Dividend Safety
Let’s take a close look at the Hormel dividend by working through a Hormel Foods stock analysis.
Investing in food sector stocks has been challenging in recent years. Especially for a dividend growth stock investor.
First of all, in 2018, General Mills bought pet food maker Blue Buffalo. And they promptly froze their dividend to help fund the acquisition.
Furthermore, in 2019, Kraft Heinz cut its dividend by a whopping 36%. The CEO sited profit shortfalls and the need to improve the company’s financial position.
Finally, due to the events of 2020, these companies got a boost. Why? Because of increased at-home meal preparation. And a return to older and trusted food brands.
No one knows for sure what the trends will be going forward. But, I do know that frozen and reduced dividends do not equate to steady dividend income and dividend growth.
Food Sector Stocks For Dividends
Similar to the utility stock sector, I like to have exposure to food sector stocks in my dividend growth portfolio. The packaged food sector has historically been known for paying consistent dividends, substantial dividend yields, and solid dividend growth.
Those characteristics are no longer universally true. Until 2020, the sector was pressured for growth due to a variety of reasons. For example:
- Changing consumer preferences
- Omnichannel retail shopping experiences
- The need for continual innovation
- And competition from private label products
These trends may have reversed for the time being. But, I would guess they will continue over the long run.
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Hormel Foods Stock And The Hormel Dividend
So, a few years ago, I went on a search for better investment ideas in the food stock sector. And I landed on Hormel Foods stock because the Hormel dividend metrics looked solid to me.
I have held many of my other dividend growth stocks for nearly 20 years. In contrast, Hormel is one of my newest additions.
Hormel Foods holds one of the smallest positions in my dividend stock investment portfolio. And now I’d like to know if I should add more money to Hormel Foods Stock.
So let’s move on with the Hormel Foods stock analysis. I will also check in with the Simply Investing report. It provides high-quality dividend stock research and recommendations.
Hormel’s stock trades on the New York Stock exchange under the ticker symbol HRL. So, I may refer to Hormel Foods as HRL or HRL stock.
Hormel Foods Company Background
Hormel Foods is a Fortune 500 company that manufactures and markets high-quality, brand-name food and meat products. Their brands number more than 50. Chances are you have consumed one or more of their products as part of a meal or snack. Here are just a few of those brand names you might recognize.
- Dinty Moore
- Lloyd’s Barbeque
- Staff Chili
- Wholly Guacamole
Hormel Food’s brands hold the number 1 or number 2 market share in more than 35 categories. Furthermore, Hormel pepperoni is the leading brand of pepperoni in retail grocery. Finally, more than 90 million jars of Skippy peanut butter are produced annually.
Source: Hormel Foods Website – Brands
Hormel Foods Profit Growth Strategy
We will get to Hormel dividend growth in a moment. I know it will come from growing profits. So the primary elements of Hormel’s growth strategy are important. They are to:
- Invest in brand spending to support organic sales growth
- Realize sales growth and cost synergies from targeted brand acquisitions
- Reduce costs across the supply chain
Facts And Figures About The Hormel Dividend
Now we have a good idea about Hormel’s branded food business. So, let’s dig into the Hormel dividend metrics next.
Does Hormel Pay Dividends?
Yes. Of course Hormel Foods stock pays dividends. I wouldn’t own the stock if it did not.
Hormel Dividend Per Share
The Hormel dividend rate per share is $.93 on an annual basis.
Hormel Dividend Yield
Based on the recent stock price, the current annual dividend rate per share puts the Hormel dividend yield at just shy of 2%.
The Hormel dividend yield is a little low. As regular readers know, I prefer a high dividend yield defined as between 3 and 5%.
The Hormel stock dividend has historically fallen below my target range. That is the primary reason why Hormel stock has not been a long term holding in my dividend growth stock portfolio.
Dividend Yield Vs. Safety Vs. Growth Rate
But sometimes rules are made to be broken. I would rather have a lower dividend that is very safe than a higher dividend yield that is a risk of being reduced or frozen.
I mentioned earlier that Kraft Heinz reduced its dividend in 2019. Dividend reductions are no fun for me (or you) as a shareholder.
However, when the dividend yield is this low, I want to see the dividend increase rapidly. 7-9% is my minimum expectation.
We will get to the Hormel dividend growth rate in a moment. Let’s cover a few more facts about the Hormel dividend first.
How Often Does Hormel Pay Dividends?
Hormel pays its dividend every 3 months or 4 times per year. Each quarterly dividend payment is 23.25 cents per share.
In What Months Does Hormel Pay Dividends?
Dividends are paid in the following months: January, April, July, and October.
Hormel Dividend History
The company touted its dividend history in a recent press release.
First of all, Hormel has paid a dividend every quarter since it became a public company in 1928. Furthermore, the annual dividend rate has been increased for 54 consecutive years.
Hormel Is A Dividend King!
54 years of consecutive dividend increases put Hormel firmly into the category of Dividend King. Dividend Kings are those rare companies that have increased their dividends annually for at least 50 years.
Looking for more good Dividend Kings? Then how about considering Coke (KO) for your investment portfolio.
Hormel Dividend Policy
As far as I can tell, Hormel Food’s management does not communicate targets or guidance about its dividend. Being a Dividend King, I expect the dividend to continue growing each in the future.
I will get to my dividend growth rate forecast in just a bit. First, let’s see how fast the Hormel dividend has grown in recent years.
Hormel Dividend Growth Rate
|1 Year||3 Years||5 Years||7 Years|
The table above shows that the Hormel dividend appreciation has been impressive. With only a 2% dividend yield I like to see annual dividend growth of at least 7%.
And Hormel does not disappoint. If you need your dividends for living expenses, dividend growth like this more than offsets inflation.
Let’s look at the business fundamentals next to see what we can learn.
Hormel Foods Revenue Trend
Revenue growth has been modest, expanding at less than 2% annually. Most importantly, Hormel has done an excellent job of reducing revenue exposure to the lower growth areas in packaged foods and beverages.
First of all, most of the categories in which they operate are on-trend. They are in areas where consumers are increasing their consumption of proteins, fresh foods, and on-the-go snacks and meals.
Furthermore, a limited amount of revenue comes from shelf-stable foods. You know those foods in the middle of the grocery store that more and more people were avoiding prior to 2020.
Finally, an even lower amount of business is in commodity meat. This consists primarily of pork and turkey.
Hormel has done a good job providing value-added, differentiated brands, and products for consumers. These areas have demonstrated pricing power over the long term.
Also, Hormel has a significant opportunity to expand its non-U.S. based businesses. Less than 10% of revenue is from outside the United States.
Hormel Dividend Payout Ratio Based On Earnings
Earnings per share have grown nicely at almost 11% per year. With relatively small revenue growth, it is clear that Hormel has done a good job increasing sales prices and reducing operating costs to expand their profit margins.
Dividend growth has exceeded earnings growth. And this has resulted in an increasing dividend payout ratio.
Based on accounting earnings, the Hormel dividend payout ratio checks in at a very safe 46%. For comparison, a decade ago the HRL stock dividend payout ratio was less than 30%
Hormel Dividend Payout Ratio Based On Free Cash Flow
Dividends are paid from cash, not accounting earnings. So, I like to cross-check dividends paid against free cash flow.
Over the past 3 years, Hormel has paid out 50% of its cash to shareholders in the form of dividends.
The remaining available cash flow has been used to either repurchase Hormel stock. Or, increase the company’s cash position on its balance sheet.
Hormel Dividend Growth Rate Forecast
I do not see the Hormel dividend growing as fast as it has in recent years. For my planning purposes, I am going to assume an 8% annual dividend growth rate for future years.
8% appears to be safe and sustainable. While also maintaining the dividend payout ratios at or below current levels.
Hormel Financial Position
Hormel has an outstanding credit rating and a very solid balance sheet. Let’s look at each individually.
Moody’s and S&P rate Hormel A1 and A, respectively.
As shown in the table below, these represent investment grade-low credit risk evaluations. This is exactly what I would expect from a Dividend King.
Furthermore, debt to equity checks in at an exceptionally low level. Debt is only .05 times equity.
Hormel Dividend Safety
Putting together several of the facts we have discussed thus far, I can make a pretty good judgment about Hormel dividend safety. I look at the following:
- Business fundamentals and prospects
- Dividend payout ratios
- Dividend history
- Financial position
Based on the combination of these factors, I judge the Hormel dividend to be very safe from a reduction for the foreseeable future.
Hormel Stock Valuation
Let’s look at HRL stock valuation in several ways:
- Dividend Discount Model
- Price to earnings ratio
- Morningstar fair value estimate
- Simply Investing Report
Hormel Dividend Discount Model
Let’s use a dividend model know as the Gordon Growth Model (GGM).
This single-stage dividend discount model popularized by Myron Gordon considers several factors I have discussed thus far.
- Current annual dividend payment – $.93 per share
- Projected dividend growth – 8%
- My desired annual return on investment – 10%
Using these assumptions, the dividend discount model suggests a fair value of $50 per share for HRL stock.
Hormel Stock Price to Earnings Ratio
The HRL stock price to fiscal 2019 earnings is 25 times. Hormel stock looks expensive on this basis.
But, quality dividend growth stocks can rarely be bought at a discounted price to earnings ratio. Hormel stock frequently trades with a price to earnings ratio in the mid-’20s.
In this regard, HRL stock reminds me of another super high-quality dividend growth stock, ADP.
Morningstar Fair Value Of Hormel Stock
The investment analysis firm Morningstar believes Hormel stock is fairly valued at $34 per share. This is well below the current market price of HRL stock.
Simply Investing Report
The Simply Investing report makes a value call based on some tough criteria. Specifically:
- Price to earnings ratio 25 or less
- Current dividend yield higher than its historical average
- Price to book ratio at 3 or less
Based on these measures, Simply Investing deems Hormel stock to be undervalued.
Thoughts On Hormel Stock Valuation
3 of the 4 stock valuation measures look reasonable to me. With only Morningstar being the clear exception.
I personally like Hormel stock at or below $46.50 per share. That equates to a 2% dividend yield.
Hormel Foods Stock Analysis Conclusions And Wrap Up
Hormel Foods is a very well-run company. They have an excellent stable of brands. And have navigated the challenges facing many large food companies quite well.
The Hormel stock dividend yield is very safe, but on the low side at 2%. However, dividend growth should compensate and be substantial for years to come.
Hormel stock looks reasonably valued to me in the mid-$40s. I will look to buy more on any price dips. And make this quality dividend growth stock a bigger part of my investment portfolio.
Further Reading About Dividend Stocks And Dividend Investing
- 5 high growth dividend stocks for an increasing income stream
- How to pick dividend stocks
- A long-time favorite consumer goods dividend stock
- Read my review about the Simply Investing report
My Favorite Dividend Investing Resources
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