Today is Valentine’s Day in America and if there is anything more symbolic of the holiday aside from flowers, it’s chocolate. Americans love chocolate and have built entire holidays around it to justify its exchange, except in the summer - consumers seem to be very reluctant to buy chocolate when it’s hot out - but I digress. Hershey (NYSE:HSY) is the pinnacle of confectionaries, and aside from announcing an increase in their dividend of 7.8%, they have provided some strong guidance for 2011.
At the beginning of the month, Q4 earnings of 61 cents a share were reported, a 2 cent drop year over year. However, on the year, 2010 bested 2009 by a whopping 17%. This was mostly due to Hershey still climbing out of the recession in the first half of 2009, but since then things have stabilized and the outlook looks promising with 2010 net sales up 6% and indications that this should continue.
2010 Halloween sales were up 3.6%. Keeping this in mind, the next two quarters will include the other big ones, Valentine’s Day and Easter. An increase in sales here would certainly be substantial for several reasons. The first is that the company has now had time to evaluate the launches of Hershey’s Drops and Reese’s Minis. Proper sales analysis will dictate if these products will go further, and if so with how much production and marketing. Secondly, it was reported that non-chocolate sales had declined. This would include products like: Twizzlers, Ice Breakers, and Jolly Ranchers. It may be time to push the chocolate harder and pull back on the reins here.
Hershey’s valuation is obviously affected by a great many factors besides their sales figures, including the market price of cocoa, overall market conditions, the healthy/organic movement, but let’s look at some things that make the stock a winner. Above I mentioned the dividend increase from 32 to 34.5 cents, a 2.8% yield. Hershey has been increasing its dividend for over a decade. They did have to halt the yearly increases in 2007 and go stagnant for 2 and a half years, but they were not forced to decrease or eliminate as so many companies were. CEO David West had said that the CMG category (candy, mint, gum) as a whole grows 3-4% annually; so 7.5% dividend percent increases may not be wholly sustainable, but it’s nice for the time being.
click to enlarge
The chart above shows Hershey’s stock price for the last 12 months with 50 and 200 day moving averages. In June I had predicted that the stock price would hover between $48 and $52 for some time. I was slightly incorrect in that it bottomed at $45 off a poor earnings report and never got past the mid-$51 mark. More recently you’ll see that the 200 day seems to be providing some strong support and the stock could probably be picked up at $48.
Now, why one want to do this? I mentioned above the positive guidance for 2011 and expected rise in earnings of about 8% annually over the next two years. Next consider the improving economy. People love to put chocolate in their offices, and unemployment has been improving, however slowly. Take these facts on top of a 2.8% dividend and it would not be difficult to see at least a 10% gain in 2011. You’d also be buying one America’s strongest companies, from a branding perspective. Lastly, it will give you an incentive to eat their products - but stick to the dark chocolate, it’s better for your heart. For those interested, keep in mind that the door to their next dividend closes on the 25th.
Disclosure: I am long HSY.