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Company Overview

Hormel Foods Corporation (NYSE: HRL) is engaged in the production of a range of meat and food products and the marketing of those products throughout the United States and internationally. The Company operates in five segments: Grocery Products, Refrigerated Foods, Jennie-O Turkey Store (JOTS), Specialty Foods, and All Other.

EPS, Dividends, FCF (click to enlarge images):

Annual Growth Rates Earnings Per Share Dividends Per Share FCF Per Share
10 year 9.31% 9.44% 5.9%
5 year 9.25% 10.67% 21.84%
1 year 15.42% 10.53% (14.22%)

Expected Earnings

  • FY 2011 - 1.59 (3.18)
  • FY 2012 - 1.71 (3.42)

*The number in parenthesis represents what the eps would be without the recent 2-for-1 split on Jan. 30, 2011. I think this provides a bit of continuity and a clear picture of where HRL's earnings are going.

Hormel has paid a dividend since 1928, and has increased its dividend for the past 45 years. By adding both the dividend yield and growth rate, we come to a total dividend return of 11.21%, which is respectable but does not leave a large margin for error.

A payout ratio that bounces between 25-40% is sustainable, has a nice margin to cover any fluctions in earnings, and leaves plenty of room for growth.

Revenue and Margins:

Years Revenue (in thousands)
2001 3,885,244
2002 3,910,314
2003 4,200,328
2004 4,779,875
2005 5,413,997
2006 5,745,481
2007 6,193,032
2008 6,754,903
2009 6,533,671
2010 7,220,719

Sales growth have averaged 7.1% over the past decade, and the past year saw an impressive 10.5% increase in revenue.

Like many other food producers, Hormal has had to deal with rising food costs, and that can be seen by their decreasing gross margin. The most significant costs came from hogs, which accounts for many of their products, including the iconic SPAM. Some of this was made up by good performance of their Jennie-O value added turkey line, which increased profits by 65% this year, and saw a decrease in wholesale turkey prices. Both operating and net margins are increasing, a strong sign that on the business side, costs are being controlled.

Balance Sheet

The balance sheet is very conservative. The only debt is 350 million in unsecured senior notes at 6.625%, which comes due in June of 2011. The company also keeps a revolving credit line of 300 million, of which the company has not drawn from. This is a nice safety net for dividend payments, although with 468 million in cash on the balance sheet, I doubt that will be a problem.

The current ratio is 1.69 and interest coverage is a healthy 24.32.

Returns:

Return on average equity has been stable between 15-20% for the past 10 years.

Stock Price Valuations

  • Current price - 26.83
  • 5 year low p/e - 13.2
  • P/E (ttm) - 18.4
  • P/E (forward) - 16.9
  • PEG - 0.99
  • 5 year high dividend yield - 2.31%
  • Dividend yield - 1.9%

Conclusion

Hormel Foods Corporation is a conservatively and intelligently run company. Their numbers show strong growth across the board, and management has effectively controlled costs. Even during the past few years, which have been challenging for any company, HRL has managed to grow sales, earnings, and dividends while increasing margins and staying out of debt. A great addition to the dividend aristocrats, I would feel comfortable initiating a position in Hormel on dips.

Source: Hormel Foods: A Delicious Addition to the Dividend Aristocrats