Hormel Foods – An Attractive Opportunity

HRL - Hormel Foods CorporationHormel Food Corp. NYSE:HRL has recently surfaced up in my S&P Dividend Aristocrats list mainly due to the pull back the stock has seen due to the recent quarter. It had been going down since the 2:1 stock split but the recent drop is more pronounced and going back to 2015 levels.

HRL – Business Overview

Founded in 1891, Hormel Foods brings to market iconic products. For more than 125 years, Hormel Foods has brought innovation, beloved brands and outstanding value to consumers, customers, communities, and shareholders.

Over 30 of their brands are No. 1 or No. 2 in their categories and the products are marketed in more than 75 countries, including China, Japan, Australia, South Korea and the Philippines. Hormel Foods continues to grow the family of brands with the recent additions of CytoSport, Applegate and Justin’s. Adding these companies to their existing broad portfolio of iconic brands keeps the company strong and on trend with today’s consumers.

HRL - About Company

 

HRL – Today’s Numbers

Ticker:NYSE:HRL
Stock:$30.91
P/E:19.14
Annual Dividend:$0.68
Dividend Yield:2.20%
Payout Ratio:41.98%
Market Cap:16.34B
Sector:Consumer Defensive
Industry:Consumer Packaged Goods
Technicals:Market Trend

 

HRL – Analysis Summary

There are 4 quantitative rules in the stock selection filtering I use to support my 7 Rules of Dividend Investing. As an investor, once you have mastered the Wealth Triangle, you must then master the Dividend Triangle and finally establish your Stock Selection Process.

The rules covered are outlined below followed by the company’s analysis for each rule.

Dividend Rule – Dividend Growth

Snapshot - PassDividend growth is expected when a business makes money but since not all dividend growth is equal, we must establish thresholds that work for our investing goals. In the accumulation years, I aim for a 10% CAGR dividend growth and in the income years, 5% CAGR growth is acceptable. A dividend drop should be an immediate sell unless there are special circumstances out of control by management.

If you aren’t thinking about owning a stock for 10 years, don’t even think about owning it for 10 minutes.
– Warren Buffett

Sustainability Rule – Revenue Growth

Snapshot - PassA company without growing revenue cannot sustain paying back shareholders for too long. It’s normal to see variation from year to year but over a longer period of time, there should be growth.

It’s far better to buy a wonderful company at a fair price, than a fair company at a wonderful price.
– Warren Buffett

Accounting Rule – Payout Ratio Stability

Snapshot - PassThe payout ratio validation over a 10-year period really highlights how the company’s bottom line can sustain the dividend it pays. Investors should be cautious when the payout ratio increases faster than the bottom line as growing revenue is not the source of dividend growth.

The secret of sound investment in 3 words; margin of safety.
– Benjamin Graham

Quality Rule – Business Quality

Snapshot - PassThe business quality is an important factor to consider to ensure your investment is viable for the long term. A strong business that has been around for a long time and is expected to be around for a lot longer is a good business.

Know what you own, and know why you own it.
– Peter Lynch

Value Rule is a potential 5th qualitative rule you can add on your own. It’s not based on numbers as it requires a more intricate knowledge of the company, its business and the markets. Consider how many analysts are following companies and how many are wrong in predicting stock price movement. Not to mention how difficult it can be for some companies to have accurate forward guidance when you take into account currency exchange and world economies. I have opted to not predict entry level. I have done as good buying at a 52-week high.

Twenty years in this business convinces me that any normal person using the customary three percent of the brain can pick stocks just as well, if not better, than the average Wall Street expert.
– Peter Lynch

Dividend Rule – HRL Dividend Growth

As a Dividend Aristocrat with 25+ years of dividend growth, Hormel Foods has established itself as a dividend grower. With that said, HRL is also a Dividend Ambassador with over 10% dividend growth over the past 10 years.

HRL - Dividend Growth
Source: Investor Relation

The dividend growth trend is as follow:

  • 3-year: 19.49%
  • 5-year: 17.41%
  • 10-year: 15.27%

While Hormel Foods has a relatively low dividend yield of 2.20% (higher due to the 52-week low), the dividend growth certainly makes up for it in the long run.

The dividend metrics for Hormel Foods meet the dividend rule requirements with a spectacular dividend growth. The Chowder Rule score is even off the chart with 17.47%

Sustainability Rule – HRL Revenue Growth

The graph below is what we want to see with revenue growth. I like to compare the EPS with the dividend and overlay the dividend payout ratio. It provides a really good picture on how the company is managing the revenue.

The EPS keeps up with the dividend growth and shows the company is capable of maintaining the growth in dividend.

  • 3-year: 18.88%
  • 5-year: 13.55%
  • 10-year: 12.44%

Further down, you can see 4 graphs as reported by Hormel Foods in their 2016 annual report. While their most recent guidance is going to be on the low end of their estimate, the trailing twelve month EPS is already above 2016 so we might still see a growth supporting the dividend growth for the year.

HRL - Dividend vs EPS
Source: HRL Annual Reports
HRL - Performance Numbers
Source: 2016 Annual Report

Accounting Rule – HRL Dividend Payout Ratio

At this point, amongst the SP500 dividend paying companies, Hormel Foods’ dividend payout is below the sector average with 41.98% but it’s an increase over the earlier rate. The payout ratio has been increasing slightly but as long as it’s under the average, and in line with guidance, it should be acceptable. Another point worth mentioning is that the dividend growth doesn’t have to be as high as it has been. While it’s good for investors, there is room to lower it and keep the payout ratio in line.

In short, there is room for adjusting the dividend if needed and still be a strong dividend growth investment.

The S&P Global rating gives Hormel Foods an ‘A’ rating which means:

Strong capacity to meet financial commitments, but somewhat susceptible to adverse economic conditions and changes in circumstances

Moody’s Rating classifies HRL as an investment grade with an ‘A1’ rating. It is an upgrade since 2015 from ‘A2’ highlighting good money management.

Quality Rule – HRL Business Quality

With 53 distinct brands split across 7 groups, Hormel Foods is a well-diversified grocery product provider. As a food provider, HRL falls in the category of providing a necessity that we all need. At the core, the business is a necessity but there is competition and a lot of margin pressure.

Below are some of their brands which you may have in the pantry/fridge or have had at some point. As mentioned earlier, 81% of the US households have a product in their home. That establishes a strong business.

HRL - Brands
Source: 2016 Annual Report

HRL – Snapshot Opportunity Score

Following the Snapshot Opportunity Score, Hormel Foods Corp.NYSE:HRL has a score of 82% (the higher, the better) for being an investing opportunity. Above 60% is a good range to pay attention to an opportunity. Anything around 80% would have a short window of opportunity unless the stock got beaten down for other qualitative reasons. See my Easy Stock Selection Process for more details on selecting stocks.

With the most recent pullback, Hormel Foods is attractive. The dividend yield is above its average and it boasts an amazing dividend growth. There is also the potential for stock appreciation through acquisition and brand management.

DISCLOSURE: Please note that I may have a position in one or many of the holdings listed. For a complete list of my holdings, please see my Dividend Portfolio.

DISCLAIMER: Please note that this blog post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your investment decisions at your own risk – see my full disclaimer for more details.