This article is about Hormel Food Corporation (NYSE:HRL) and why its a total return investment that's being added to The Good Business Portfolio. Hormel Food Corporation is a multinational manufacturer and marketer of food and meat products. The Good Business Portfolio Guidelines, Total Return, Last Quarter's Earnings, Company Business and Takeaways and Recent Portfolio Changes will be looked at.
Good Business Portfolio Guidelines
Hormel Food Corporation passes 10 of 10 Good Business Portfolio Guidelines. These guidelines are only used to filter companies to be considered in the portfolio. For a complete set of the guidelines, please see my article "The Good Business Portfolio: All 24 Positions." These guidelines provide me with a balanced portfolio of income, defensive, momentum, and growing companies that keeps me ahead of the Dow average.
Hormel Food Corporation is a large-cap company with a capitalization of $22.9 billion. The large size of Hormel Food Corporation gives it the muscle plus it's cash flow to get loans to easily raise capital to buy new companies. As an example last year in 2015 they bought Applegate Farms. There are at least 4-5 companies in the $2 -$6 Billion range that could be bought by Hormel Food Corporation. Also there are opportunities in foreign countries for expansion of the business.
Hormel Food Corporation has a dividend yield of 1.34% which is below average for the market. The dividend has been increased for 9 years out of the last ten years and its dividend is very safe. Hormel Food Corporation is therefore not a good choice for the dividend income investor. The average payout ratio is very low at 34% over the past five years. After paying the low dividend this leaves plenty of cash remaining for investment in new company purchases and plant expansion.
Hormel Food Corporation cash flow is good at $820 Million which leaves enough cash after paying its low dividend for normal business expansion, but would require additional financing in the case of buying a large company.
I also require the CAGR going forward to be able to cover my yearly expenses. My dividends provide 3.1% of the portfolio as income and I need 1.9% capital gain in addition for a yearly distribution of 5%. Hormel Food Corporation has a three-year CAGR of 10% well above my overall requirement. Looking back five years $10,000 invested five years ago would now be worth $34,500 today ( from S&P Capital IQ). This makes Hormel Food Corporation a good investment for the total return investor with the low dividend and steady above average growth.
Hormel Food Corporation S&P Capital IQ has a three-star rating or hold with a price target of $47.00. This makes Hormel Food Corporation fairly priced at present. In the long term Hormel Food Corporations above average growth and its defensive business lets you sleep well at night with a good total return investment.
Total Return and Yearly Dividend
The Good Business Portfolio Guidelines are just a screen to start with and not absolute rules. When I look at a company, the total return is a key parameter to see if it fits the objective of The Good Business Portfolio. Hormel Food Products had better total return than the Dow baseline in my 39 month test period. I chose the 39 month test period (starting January 1, 2013) because it includes the great year of 2013, the moderate year of 2014, the small loss year of 2015 and the slightly positive year of 2016 YTD to see how the company does in good and bad markets. I have had comments about why I do not compare the total return to the S&P 500 average. I use the Dow average because the Good Business Portfolio has six Dow companies in it and is weighted more to the Dow average than the S&P 500. Modeling the Dow average is not an objective of the portfolio but just happened by using the 10 guidelines as a filter for company selection. This great total return for Hormel Food Corporation makes it appropriate for the Total Return growth investor. The dividend is low at 1.34% and has been increased 9 of the last ten years, slow and steady wins the race.
DOW's 39 month total return baseline is 35.78%
39 Month total return
Difference from DOW baseline
Yearly Dividend percentage
Hormel Food Corporation
Last Quarter's Earnings
For the last quarter Hormel Food Corporation reported earnings on February 16, 2016 that beat expected at $0.43 compared to last year at $0.35 and expected at $0.37. Revenue decreased a small amount to $2.3 Billion total revenue. This was a great report showing the result of the lower sales of turkey volumes but still beat the expected earnings estimate. Earnings for the next quarter will be released in mid May and are expected to be at $0.37 compared to the last year at $0.34. Management guided 2016 earnings to $1.50 - $1.56/share an increase from previous guidance by $0.08.
Hormel Food Corporation is a multinational manufacturer and marketer of food and meat products. The Company has five segments: Grocery Products, which consists of the processing, marketing and sale of shelf-stable food products sold primarily in the retail market; Refrigerated Foods, which consists of the processing, marketing and sale of branded and unbranded pork and beef products for retail, foodservice and fresh product customers; Jennie-O Turkey Store, which consists of the processing, marketing and sale of branded and unbranded turkey products for retail, foodservice and fresh product customers; Specialty Foods, which consists of the packaging and sale of private label shelf stable products, nutritional products, sugar and condiments to industrial, retail and foodservice customers, and International & Other, which includes the Hormel Foods International operating segment, which manufactures, markets and sells the Company products internationally. The 10% projected growth and the opportunity to buy other companies allows Hormel Food Corporation the capability to continue its strong growth cycle. Also the business is defensive if the economy weakens, we all have to eat.
Takeaways and Recent Portfolio Changes
Hormel Food Corporation is a good Total Return choice considering the Total Return well over performing the Dow average and its low dividend, and Hormel Food Corporation has a 10% CAGR going forward, well above my requirements. The good Business Portfolio has added Hormel Food Corporation to the portfolio from the sale of some shares that are not performing well like Novartis (NYSE:NVS). If you don't already have a position in the food business Hormel Food Corporation may be worth a position for your total return growth segment of your portfolio.
Sold some covered calls on Cabela's (NYSE:CAB) for income while we wait for the takeover and the next earnings report. Sold April 50's at $1.68, and will buy them back if the premium drops to $0.32. Bought the calls back at $0.28 for a contract gain of $1.40/share, taking 80% of the premium allows another trade in the same month if CAB suddenly goes up in the same month. As of 4/1/2016 CAB is back up to $49.50, so I may sell covered calls again in this month to collect two premiums on the same shares in one month, hitting a double.
Sold position in Hanes Brands (NYSE:HBI) , The last earnings report was not good and the market action did not show strength. There is now a slot open for a new company to be added to The Good Business Portfolio and has been filled with Hormel Food Corporation.
Bought Some more Omega Health Investors (NYSE:OHI) , now at 3.4% of The Good Business Portfolio. I intend to keep adding to OHI until its 4% of the portfolio a full position and watch it grow. The dividends are being reinvested in shares of OHI.
Trimmed NVS to 0.8% of the portfolio, there growth and projections going forward do not look promising.
Started a small position in Hormel Food Corporation at 0.3% and will see what the next quarter brings before increasing the position.
The Good Business Portfolio generally trims a position when it gets above 8% of the portfolio. Home Depot (NYSE:HD) is 8.4% of portfolio, Johnson and Johnson (NYSE:JNJ) is 8.3% of the portfolio, Altria Group Inc.(NYSE:MO) is 7.4% of the portfolio, Boeing (NYSE:BA) is 7.6% of the Portfolio and L Brands (NYSE:LB) is 6.9% of the portfolio, therefore HD and JNJ are now in trim position with Altria Group Inc., L Brands Inc. and Boeing getting close. Boeing is going to be pressed to 10% of the portfolio because of it being cash positive on individual 787 plane costs, announced in the last quarter earnings call.
For the total Good Business Portfolio see my recent article on 2015 fourth-quarter performance for the complete portfolio list and performance. Become a follower and you will get each quarters performance after the earnings season is over.
I have written individual articles on CAB, JNJ, EOS, LB, GE, IR, MO, BA, Omega Health Investors and HD that are in The Good Business Portfolio and other companies being evaluated by the portfolio. If you have an interest please look for them in my list of previous articles.
Of course this is not a recommendation to buy or sell and you should always do your own research and talk to your financial advisor before any purchase or sale. This is how I manage my IRA retirement account and the opinions on the companies are my own.
Disclosure: I am/we are long BA, HD, CAB, JNJ, LB, MO, OHI, HRL.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.