Hormel Foods Is An Ideal Dividend Aristocrat For Troubled Times

Summary

• So far, Hormel's impressive growth over time was in the U.S. But global expansion has management optimistic that it can drive steady growth for decades more.
• Hormel's five-year consensus total return potential is 5%-11% CAGR.
• Hormel Foods is a potentially ideal choice for conservative income investors who want to sleep well at night no matter what the economy does.
• This idea was discussed in more depth with members of my private investing community, iREIT on Alpha. Learn More »

Justin Sullivan/Getty Images News

This article was coproduced with Dividend Sensei.

Well, it's this time of the week where I discussing something other than real estate investment trusts (REITs). As my loyal readers know, I’ve been expanding coverage to:

1. Diversify my own personal retirement account
2. Assist my mother with picks for her retirement account
3. Provide a diversified retirement portfolio for iREIT on Alpha members
4. Provide thoughtful research for my followers

Most of you know by now that September wasn’t the most pleasant one for the markets. Take Sept. 28's closing stats, for instance:

(Source: Morningstar)

But if a 2% down day for the market scares you, then you haven't been investing very long.

Consider the 19.4% correction of 2011, which was mainly due to the debt ceiling crisis at the time. The result was a market drubbing that impacted a completely strong, completely unrelated company.

Truth be told, almost every company will fall during periods of extreme market fear.

But price fluctuations mainly have a single significant meaning for the true investor. To quote Benjamin Graham:

“They provide him with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal.”

That’s why Dividend Sensei and I use sound asset allocation and risk management to identify world-class quality dividend kings like Hormel (NYSE:HRL). Even if we get another Great Recession due to current dramas, this kind of company is a great way to ride out tough economic times.

During the last 15 years, it’s boasted average annual volatility of just 18.5%. Compare that to the average aristocrat’s 23% and the average company’s 28%.

All while it enjoys relatively attractive, very safe, and steadily growing dividends in all economic and market conditions.

How about that to help sleep better at night? But let’s break it down all the same…

Reason 1: World-Class Safety, Quality and Dependability

Here’s how Hormel scores according to Dividend Kings, which runs one of the world's most comprehensive and accurate safety models…

HRL used to have Ultra SWAN status, but its profitability fell to 74th percentile – 1% below the 3/3 wide-moat cutoff. Margins are expected to recover in the coming years, however, putting it on track to regain its original status.

Hormel Foods is the 102^nd (out of 508) highest-quality company on Dividend King’s Master List. That puts it in the 80th percentile of an already elite collection.

That means it’s similar in quality to:

• Philip Morris International (PM)
• Nike (NKE)
• 3M (MMM)
• Walmart (WMT)
• Mastercard (MA)

Hormel was founded by George A. Hormel in 1891 in Austin, Maine. This protein-focused company produces brands like Spam, Jennie-O, Dinty Moore, AppleGate, Wholly Guacamole, and Skippy.

Sixty-seven percent of its revenue comes from U.S. retail, 26% from U.S. food service, and 7% international. And you also can break it down by product type, with 22% of revenue being shelf-stable foods last year. Another 20% was poultry, 55% was non-poultry perishables, and 3% fell into the “other” category – mainly nutritional products.

With its Spam bran, it should come as no surprise that Hormel holds the top market spot in the shelf-stable meat category. But Morningstar adds that it boasts the same claim for “shelf-stable ready meals, pepperoni, natural/organic deli meat (and) guacamole.” And it’s No. 2 “in turkey, bacon, chilled ready meals, and peanut butter."

Essentially, this is a recession-resistant business with a beloved food empire.

(Source: Investor presentation)

An empire with global expansion plans that can drive steady growth for decades more.

Of course, the whole globe is experiencing shortage issues right now, which is why I’m going to quote Morningstar again:

“Like its packaged food peers, Hormel is experiencing significant challenges stemming from labor shortages, supply chain disruption, and inflation. But we think Hormel’s strong brands (one factor underpinning its narrow moat) should allow the firm to successfully pass higher costs to consumers.

“In fact, management said its brands are outperforming the volume impacts predicted by its elasticity models. Further, as many of the products Hormel sells to the food-service channel are prepared foods – designed to help restaurants save on labor costs – strong demand for these items is driving market share gains for Hormel.”

As it adds, the company’s fiscal third quarter sales rose 20%, which was better than expected. Also, while labor and material shortages did put a pause on some of its production lines, its acquisition of Planters nuts this year helped offset that damage – making it an even better purchase.

And while its earnings fell, it was only half as much as the S&P. All told:

“Based on year-to-date marks, we plan to increase our fiscal 2021 organic sales estimate to 11% from 5% and lower our adjusted operating margin to 10.3% from 11.2%. We maintain our long-term expectations for 3% annual sales growth and 13%-14% operating margins, as Hormel has a successful track record of managing inflation through cycles."

That’s because its defensive core position has now ridden out 27 recessions and delivered 54 consecutive years of dividend growth.

That's thanks to an exceptionally-skilled management team and adaptable corporate culture. We rate management’s capital allocation actions as exemplary, owing to Hormel’s sound balance sheet, effective capital allocation, and disciplined acquisition strategy. As Morningstar writes,

“It has a record of extracting value from acquisitions by increasing points of distribution, household penetration, and market share.” Take its 2018 purchase of Columbus, a premium deli meats company for $857 million, which positions it “as a total deli solutions provider.”

As for its Planters purchase this year, that was for $3.4 billion. With a $560 million tax benefit that cuts the cost and the 10% addition, it makes to Hormel’s sales base…

We have to agree with Morningstar that it’s worth it. And that Hormel will be able to revitalize the brand into something very worthwhile. It has a history of that kind of transformation, taking companies from average or even subpar to industry-leading rates.

Even SPAM is growing at double digits, showcasing the skill of this management team.

And when it can’t achieve that, it makes sure to off non-strategic parts of its business that aren’t living up to expectations. That’s helped it achieve operating margins of 12% – up from 9% – in the last 10 years.

Then there’s its 54-year dividend growth track record, as already mentioned. What we didn’t mention, however, is that it hasn’t missed a payment in 93 years. Or that it’s a regular for falling in the top 25% of profitability among its peers.

Naturally, that gives us even more confidence in this company and who’s running it. And S&P and Moody’s don’t have too shabby an opinion of it either, rating it A (negative outlook), and A1 (stable outlook), respectively.

For the record, the reason why S&P isn’t entirely certain about its immediate ranking is because of the Planters purchase. While it likes the overall acquisition, it has moderate concerns about “the possibility that leverage will remain above 1.5x” as a result.

And, to address S&P’s concern, Hormel's elevated debt from the Planters deal should steadily decrease thanks to debt-repayment plans and growing cash flow.

Really, Hormel's cash flow growth over the next few years is impressive in a generally slow-growing industry.

The bond market, known as Wall Street’s smart money, likes Hormel's business so much it's willing to lend to it for 30 years at 2.7%.

The company’s average borrowing cost is 2.14%. Its consensus future borrowing costs are about 1.7% And analysts expect those borrowing costs to steadily fall over time.

(Source: GuruFocus Premium)

Hormel historically has good profitability despite current supply chain disruptions. For proof of that, here’s trailing 12-month profitability vs. its 1,758 major consumer packaged goods peers.

HRL's stable profitability over the last 30 years confirms that this is normally a stable wide-moat company.

Plus, margins are expected to slowly recover. And returns on capital – Joel Greenblatt's gold standard proxy for quality and moatiness – are expected to be 3.6x its industry peers in 2023.

In fact, Hormel's returns on capital have been trending higher for 30 years.

Seventy percent is the payout ratio safety guideline for this industry, and HRL is expected to be about 16% below that. Meanwhile, the dividend should grow at a robust 7% in the coming years…

While the company retains enough earnings after to potentially pay off almost half its debt or buy back 2% of its stock each year.

Management's capital allocation priorities are excellent. And its goals to reach 1.5 debt/EBITDA by 2023 should allow it to easily retain its A credit rating.

Basically, this is a dividend growth legend you can rely on in all economic and market conditions.

Reason 2: A Long Growth Runway for Delivering Decades of Steady Dividend Growth

Now that the lockdowns are over and Hormel's factories are working at full capacity, its merger and acquisition (M&A) and industry consolidation strategies should deliver very impressive growth. For a consumer staple blue chip, that is. But still.

Buybacks also are opportunistically used to help drive steady growth over time. And, everything considered, analysts expect Hormel to grow at 6%-7.8% over time.

Smoothing for outliers like shutdown disruptions, margins of error are zero to the downside and 10%-plus to the upside. This means a 6%-9% CAGR adjusted growth consensus range.

Management's long-term guidance, meanwhile, is for 7%-10% growth – which would possibly allow it to keep delivering its historically market-beating returns for decades to come.

Reason 3: A Wonderful Company at a Fair Price

(Source: FAST Graphs, FactSet Research)

Over 20 years, tens of millions of investors have determined that a price-to-earnings ratio between 19 and 23.5 is approximate fair value for HRL. Which makes it a classic Buffett-style “wonderful company at a fair price” today.

So anyone buying Hormel today is likely to fully participate in its future growth and upside. Which makes it a much safer, better bet than the 26% overvalued S&P 500.

And aristocrats are expected to deliver just about 6.6% compound annual growth rate ("CAGR") returns over the next five years. Whereas Hormel's consensus is 5%-11%.

Over the long term, analysts expect a 2.4% yield (vs. 2.3% for aristocrats) + 6% growth (vs. 8.9%) = 8.4% CAGR total return potential. Or, again, we’re looking at an 8.4%-11.4% range.

Management’s guidance is for 9.4%-12.4%.

Since 1990, its yield has been 1.5%. This year, its yield on cost is 83.7%.

Admittedly, Hormel is likely to grow slower than it has in the past, delivering similar returns to the S&P 500.

HRL Vs S&P 500 Vs Aristocrats Inflation-Adjusted Long-Term Return Forecast: $1,000 Investment

Time Frame (Years)	7.9% LT Inflation-Adjusted S&P Consensus	9.2% Inflation-Adjusted Aristocrat Consensus	6.3% CAGR HRL Consensus	7.8% CAGR HRL Mid-Range Management Guidance
5	$1,462.54	$1,552.79	$1,357.27	$1,455.77
10	$2,139.02	$2,411.16	$1,842.18	$2,119.28
15	$3,128.40	$3,744.03	$2,500.34	$3,085.19
20	$4,575.40	$5,813.70	$3,393.64	$4,491.33
25	$6,691.69	$9,027.47	$4,606.08	$6,538.36
30	$9,786.86	$14,017.78	$6,251.70	$9,518.38
35	$14,313.66	$21,766.69	$8,485.24	$13,856.60
40	$20,934.27	$33,799.13	$11,516.77	$20,172.07
45	$30,617.17	$52,483.01	$15,631.36	$29,365.96
50	$44,778.78	$81,495.18	$21,215.99	$42,750.19

Click to enlarge

Time Frame (Years)	Ratio Aristocrats to S&P Consensus	Ratio HRL Consensus vs. S&P	Ratio HRL Management Guidance/S&P
5	1.06	0.93	1.00
10	1.13	0.86	0.99
15	1.20	0.80	0.99
20	1.27	0.74	0.98
25	1.35	0.69	0.98
30	1.43	0.64	0.97
35	1.52	0.59	0.97
40	1.61	0.55	0.96
45	1.71	0.51	0.96
50	1.82	0.47	0.95

Click to enlarge

But here's how to combine Hormel with other aristocrats, such as Philip Morris (PM), a mini-portfolio basket of world-class companies that can ride out just about any economic downturn.

HRL combined with recession-resistant Ultra SWAN dividend king Philip Morris creates a 3.7% yielding, 9.1% growing safe income powerhouse that analysts think could deliver 12.8% long-term returns.

Hormel combined with PM is offering a yield that's only surpassed by blue-chip midstreams but is also expected to outperform both the aristocrats and even the tech-heavy Nasdaq over time.

Risk Profile: Why Hormel Isn't Right for Everyone

There are no risk-free companies, and no company is right for everyone. You always have to be comfortable with an asset’s fundamental risk profile.

So here’s Morningstar’s risk profile summary:

“COVID-19 caused significant demand volatility from the firm's food service (26% of fiscal 2020 sales) and retail customers (67% of sales).

“Further, illness among plant workers resulted in production inefficiencies, and even temporary plant closures during fiscal 2020. While the market is returning to normal (with food-service sales returning to pre-pandemic levels in the second quarter), new strains of the virus could cause another wave of disruption.

“Another risk Hormel faces surrounds the cost of raw materials (primarily hogs and turkey), which can fluctuate due to supply or demand shocks, drought, volatility in grain prices (turkey feed), herd/flock disease, and trade restrictions.

“Hormel raises its own turkeys and purchases live hogs to meet some of its need for pork although, in fiscal 2019, it sold one of its two hog-processing facilities, reducing this exposure. If the prices of grain or hogs increases substantially, Hormel’s margins may suffer if the company cannot pass the higher costs through to customers.

“For example, in 2008 when grain prices soared as a significant portion of corn was diverted for ethanol fuel, the Jennie-O turkey segment’s operating margins fell to 6.0% from 8.5% the prior year. Prices for hogs and grain have surged in fiscal 2021, but Hormel has hedged its exposure, which should materially limit profit volatility.

“Hormel faces many environmental, social, and governance risks related to the healthfulness of its products, carbon emissions, water usage, food safety, and labor relations.

“Consumers are eating less pork, which has been linked to certain cancers, in favor of poultry. Our model takes these trends into account, assuming only modest long-term growth for pork.

“We view Hormel's other ESG risks as less material, as management is competently managing them. In fact, Hormel excels at labor relations in our view, offering employees very generous benefits, such as paying full community college tuition for all dependents of employees."

So, in short, HRL's risk profile includes:

• Ongoing pandemic production disruption (falling and transitory)
• Litigation risk (from products harming consumers)
• Regulatory risk (operating to FTC approving future acquisitions)
• M&A execution risk
• Industry disruption risk (changing consumer tastes away from their core products)
• Supply chain disruption risk
• Commodity price risk
• Talent retention risk (and industry leader in labor relations)
• Currency risk (small but will grow if HRL's overseas expansion succeeds)
• Governance risk (HRL foundation controls 48% of the stock)

And Moody’s adds this:

“The coronavirus outbreak and the government measures put in place to contain it continue to disrupt economies and credit markets across sectors and regions. Although an economic recovery is underway, it is tenuous; and its continuation will be closely tied to containment of the virus. As a result, there is uncertainty around our forecasts. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.

“Hormel's exposure to environment risk is moderate. Moody's considers environmental risk to be material to the overall credit profile of companies exposed to the animal protein sector. Moody's incorporates risks of direct environmental hazards — the impacts of pollution, water shortages, climate change and natural or human-caused disasters - and we may consider such aspects as liability, clean-up costs, capital costs, and carbon regulations to prevent or remediate these risks.

“Hormel is exposed to social risks related to shifting consumer preferences. Notwithstanding recent favorable demand dynamics from greater at-home food consumption related to the coronavirus, Moody's expects that over the long-term, shelf-stable food products will gradually lose market share to fresher produce typically found on perimeters of grocery stores.

“Historically, Hormel has operated with a very conservative financial policy that is indirectly influenced by the Hormel Foundation. The foundation doesn't have any direct board representation, but owns approximately 48% of Hormel Foods common stock. The Foundation's goals are to maintain Hormel's independence, stability, and local presence in Austin, Minnesota and to provide for the financial welfare of the Hormel family heirs, all of which support a continued conservative management philosophy."

In Conclusion…

Hormel and Philip Morris as a high-yield/fast-growth combo are likely to sail through any economic downturns with very little risk of a dividend cut.

Alone or in combination with other aristocrats, Hormel is a potentially ideal choice for conservative income investors who want to sleep well at night no matter what the economy or stock market is doing.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of HRL either through stock ownership, options, or other derivatives. 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.

Author's Note: Brad Thomas is a Wall Street writer, which means he's not always right with his predictions or recommendations. Since that also applies to his grammar, please excuse any typos you may find. Also, this article is free: written and distributed only to assist in research while providing a forum for second-level thinking.

Comments

[Navy Fightin' Blue]

Stock is down 15% over the past 52 weeks. Near a 52-week low. Seems like a great time to buy considering the market is at all-time highs and 30% overvalued.

[Et20]

Seems like a good stock pick with empty shelf joe and supply chain issues.

[justanopion]

People need to eat and hrl is there to supply the food and moving into international market. I sleep well at night

[Always Bullish]

Great analysis. If bought with the right margin of safety this is a stock whose holding period is forever

[justanopion]

Love spam as do a lot of people I associate with. Hawaii must be on to something. I sleep well at night with this company

[boog3]

My father fought in the Second World War. Two things he would not allow in the house. Creamed chipped beef and spam. Btw love applegate. Didn’t know they were hormel.

[Brad Thomas]

@boog3 I love creamed chipped beef ;)

[m8]

Broke $49 in Nov 2020 and hasn't been back above it since. Just a slow grind down to $40 where it has settled in. The 2020 open was $46.70 and that held it a couple of times but no real upside moves to hang a hat on. Very average - range bound and maybe mid 30's in their future by Xmas. Better places to put your hard earned money.

[Brad Thomas]

@m8 I spread my hard earned money around, just I do with Skippy ;)

[mashes2]

Thanks Brad, Picked up some this a.m.

[GratefulGuy57]

How does management continue to grow sales of SPAM? That makes them miracle workers in my book. Analysis is sound but there isn't a single brand there that my family uses. It's not a reason not to invest but it certainly gives me pause.

[Brad Thomas]

@GratefulGuy57 Thanks for reading & commenting....

Full disclosure: I don't eat SPAM

[KS_Rider]

@Brad Thomas I've had mixed feelings about Spam after eating a lot of it waaay back in the 1960's and 1970's. I had Spam musubi in Hawaii about 20 years ago and wow I really liked it. That opened the door to trying fried Spam again and darn if I didn't find I loved that. Oddly, I enjoy it more than bacon!

Turned out my wife was family friends with Julius Zillgitt who was instrumental in the development of Spam. What a character he was and it has led to me having some peculiar fondness for Spam.

[Yields4Travel]

@GratefulGuy57 Spam is growing because of the pandemic and loss of income.
Please open & read the link below...Long HRL 25 years.

www.businessinsider.com/...

[Here2Learn&Earn]

I'm in if price drops to $25, allowing for some margin of safety. Drop the price for me and I'll take the risk.

[Brad Thomas]

@Here2Learn&Earn Thanks for reading and all the best

[erlichi]

PE of 26. Like the whole market it is overvalued.

[Brad Thomas]

@erlichi Not in REIT-dom.... Come check out iREIT on Alpha !!

[Peter Jaworowski]

Thanks for the nice article. I agree this is when people want to be buying HRL. I’ve been a shareholder from the low $30’s years ago, the stock price climbed into the $50’s (which was a little too high) and now it’s certainly a buy.

Hormel is dealing with the same situation all consumer products companies are at the moment. Costs have gone up too quickly and there is a lag between the costs going up and the companies raising prices. This is a correctable situation, but you have to make the investment BEFORE all these companies start announcing better results from their newly implemented higher prices.

Keep in mind that the Hormel Foundation owns 48% of Hormel, which allows for a long term focus. Planters was a big acquisition and it’ll take a few years to get the balance sheet back to where it was, but Hormel will.
How many other companies are there that usually operate with more cash than debt? Not many.

[Arimnestos]

@Peter Jaworowski It's the balance sheet strength that most investors miss when assessing HRL and concluding it is overpriced. I just bought in and will add to my position if it breaks below 40.

[J2.0]

Why is the quant and momentum bearish?

[Dividend Pro]

Does HRL violate the Chowder Rule? That is very important.

It is at fair value at best according to FAST Graphs and other sources. No bargain.
No need to jump in yet for those looking.

And like your Guru Focus table clearly shows in Big Bold Red, all current metrics for HRL are worse than historically. You forgot to mention that little point. That is likely contributing to the price slide this year.

I like fried spam when I visit Hawaii ( largest Spam consumers), and like the company. But not a buyer here.

This article reads a bit like a pump, as negatives were not properly covered (as others have pointed out also). I expect better from you Brad! You are better than this.

BTW: They may be #2 in peanut butter, but other than #1 Kraft, nobody else counts in that race.

[TraderJoeZ]

@Dividend Pro Kraft peanut butter in the US is Planters, which Hormel now owns.

[Peter Jaworowski]

@Dividend Pro it’s not Kraft for #1 in peanut butter, it’s SJM with JiF.

[Dividend Pro]

@Peter Jaworowski

Oops. My bad. Should have said Jif (not Kraft in USA ).

I do prefer Kraft peanut butter, so that was on my mind since I am in Canada. In Canada, Kraft seems very dominant.

But in the USA, Jif owns more than 1/3 of the US market. All others trail far behind. Not the same in other countries.

[craftbrewinfo]

p/e still up there , but the yield is highest I have seen in years ..

[SenorPablo]

If the HRL chart is not an A-1 example of a falling knife, what is?

[Higher 4 Longer]

Timely article and great read. I just purchased some HRL this week.

[craftbrewinfo]

@Gordon Gekko Greed your screen name is awesome lol !!

[Nescience]

"Over 20 years, tens of millions of investors have determined that a price-to-earnings ratio between 19 and 23.5 is approximate fair value for HRL."

What is the source of the alleged "tens of millions of investors" statistic?

Data underlying historic P/E ratio calculations involve trade pricing and corporate earnings, not number of distinct investors trading a particular security over time.

[alexalekhine]

@Nescience How many investors do you think there are?
The ones that didn't buy it made as much of a decision as those who sold and those who did not buy.

[witrakw]

Thanks for the article. Seems like a solid company but its Fastgraphs chart looks abysmally overpriced. Chuck C might say “wait for better valuation”?

[StevedoreD]

@witrakw ironic isn’t it? The stock is down ~20% from its 52 week high, yet is still substantially overvalued.

[ferjen]

@StevedoreD Hmmm...based on it's 16 year chart, it's on sale bigly. Look at that juicy Average CAGR over 16 years.

invest.kleinnet.com/...

And over 30 years, it's still looking like a buy, with an awesome Average CAGR near 14%:

invest.kleinnet.com/...

I'll take 14% all day long. And their dividend yield is near the highest it's ever been in 30 years:

www.macrotrends.net/...

[ChuckXX]

HRL---Hmmmm lets see now. 1 Year Return is --10.7%, 3 Year Annualized Return is 3.51%, 5 Year Annualized Return is 3.46%. Divie is pretty small by my standards at 2.33%. I say Thanks but No Thanks. Better places to put my hard earned money.

[gregwardson]

@ChuckXX Oops, you neglected to mention a single one. Oh, well…

[ChuckXX]

@gregwardson Iam not understanding your comment. But if you want to buy HRL feel free to do so. I just don't see where it looks all that good to me. In the last 5 years you would have made 3.46% of your hard earned money. There are tons of places over the last 5 years that would have beaten that return hands down. During the height of the pandemic I was buying lots of high quality preferreds that were being shot. Now they are all trading way over par.