Hormel Dividends: Where's The Juice?
Summary
- Hormel Foods, a consumer staple stock, has faced challenges such as volume declines and pricing struggles, leading to a 26% decline in its stock price from its 52-week high.
- The company aims to improve its business by increasing meat availability, streamlining its product portfolio, and aligning services with customer needs, while maintaining a healthy balance sheet and growing free cash flow.
- Hormel Foods can be a suitable addition to a conservative dividend portfolio during periods of subdued inflation and healthy consumer sentiment, with potential investors considering starting small and averaging down.
David McNew
Introduction
On May 28, I wrote an article titled PepsiCo: The Exclusive Consumer Staple Gem In My Portfolio. As that title suggested, PepsiCo (PEP) is the only consumer staple stock in my portfolio. It's a competitive space, and I prefer companies that come with a mix of both growth and value - consumer staple stocks tend to mainly come with value.
With that said, I do have a list of consumer staple stocks that I eventually want to add to my portfolio or portfolios that I indirectly manage and advise.
One of these stocks is Hormel Foods Corporation (NYSE:HRL), a Minnesota-based giant with a large portfolio of meats, nuts, deli, and food service products.
The reason I'm covering HRL again is that its stock is down 26% from its 52-week high, which has pushed its dividend yield to 2.9%. Also, its upcoming earnings might provide us with a buying opportunity.
FINVIZ
While some companies benefit from higher inflation, Hormel is struggling - big time. Volumes are down, and pricing is unable to support positive revenue growth. The result is a weak stock price faced with more uncertainty.
Hence, in this article, we'll assess the attractiveness of this conservative and defensive 2.9% yielding dividend stock.
I'll also comment on the upcoming earnings release.
So, let's get to it!
The HRL Dividend & Relative Performance
Hormel Foods currently yields 2.9%. That's not a lot. However, the company is a dividend king. The company has hiked its dividend for 57 consecutive years, which makes it a part of the exclusive club of companies with more than 50 consecutive years of hikes.
Please note that the overview below shows just 21 consecutive annual hikes. That's not correct and likely the result of a spin-off, which tends to mess with these numbers.
Seeking Alpha
That said, here are some important dividend-related numbers:
- HRL yields 2.9%. The median yield in the consumer staples sector is 2.6%. The Consumer Staples ETF (XLP) yields 2.4%.
- The company has a 60% payout ratio, which is roughly in line with the sector median of 61%.
- Over the past ten years, HRL's dividend has been hiked by 12.8% per year.
- The three-year average is lower at 6.5%. That number is roughly 150 basis points above the sector median.
The most recent hike was 5.8%, which was announced on November 21, 2022.
While the company's dividend yield is satisfying in light of the sustainable payout ratio and history of consistent hikes, the stock price has become a total mess. The stock price is back where it was in early 2016.
Including dividends, HRL has returned 14.6% over the past five years. The XLP ETF has returned 64% during this period.
At this point, I have to mention that HRL has returned 130% over the past ten years. If it weren't for the recent decline, HRL would have outperformed its peers by a wide margin.
That said, the recent decline happened, and it was caused by slower financials. As the chart below shows, the company's free cash flow has run into resistance. Given that free cash flow is the basis for dividend growth, it's no surprise that investors jumped ship to buy stocks with more growth.
So, what's happening to Hormel?
Why Hormel Ran Into Resistance
The first quarter was highly challenging. Sales declined by 2% due to volatility in overall volume and net sales, impacted by planned volume declines in commodity pork and the effects of highly pathogenic avian influenza on the turkey supply chain.
Diluted net earnings per share for the quarter were $0.40, representing a $0.04 decline compared to the previous year and a $0.05 miss versus analyst estimates.
The results were affected by inflationary pressures, supply chain inefficiencies, and lower sales volumes across all business segments.
Hormel Foods
The Retail segment experienced a decline compared to the previous year. Net sales growth from specific verticals, such as bacon, global flavors, convenient meals and proteins, and emerging brands, was offset by lower sales in the value-added meats and snacking and entertaining verticals. Segment profit declined due to the impact of lower net sales, unfavorable mix, and higher operating costs.
Volumes alone were down 13% year-on-year.
Hormel Foods
In the Foodservice segment, products in sliced meats, pepperoni, premium prepared proteins, premium bacon, and breakfast sausage categories achieved volume and net sales growth.
However, the overall decline in volume was driven by limited turkey and fresh pork availability. Segment profit increased due to an improved mix across the portfolio, but the results were below expectations due to industry softness in December and January.
Hormel Foods
The International segment faced external factors impacting its performance. Branded export business showed strength, led by the SPAM and SKIPPY brands. Brazil also delivered improved results.
However, commodity turkey volumes declined significantly due to export restrictions, and the China business faced challenging operating conditions related to COVID-related policy changes.
Hormel Foods
Based on these developments, the company reaffirmed its top-line expectations and adjusted the diluted net earnings per share outlook for fiscal 2023. Despite softness in the first quarter, the company expects growth for the year. Management anticipates favorable demand for their retail brands, strong growth in the Foodservice segment, and improved conditions in the international segment. However, supply chain inefficiencies and inflationary pressures are expected to last.
Hormel Foods
With that in mind, the company is improving its business.
Business Improvements & Valuation
Hormel Foods expects to improve meat availability in the back half of the year to drive higher sales volumes for its turkey business. While turkey markets have become less favorable, demand for general turkey products remains strong.
Reduced production volume in its turkey facilities is expected through the end of the second quarter before steadily improving. The company has made significant progress in fully integrating Jennie-O Turkey Store into its One Supply Chain, a new operating segment.
By the end of fiscal 2023, the company remains on track to achieve $20 million to $30 million of savings on a run-rate basis.
Furthermore, the company purchased a 29% common stock interest in Garudafood, a leading food and beverage company in Indonesia, for a purchase price of $411 million. This includes associated transaction costs. The transaction was funded using cash on hand and is not expected to have a material impact on fiscal 2023 results.
Hormel Foods
Related to its business investments, the company is using One Supply Chain and GoFWD initiatives. Hormel's new strategic operating model aims to align the businesses with the needs of customers, consumers, operators, and shareholders for sustainable long-term growth.
The company hopes that this streamlines its product portfolio and allows it to better align its services with customer needs - especially in a high inflation environment, which makes consumers very picky (price sensitive).
Hormel Foods also maintains an extremely healthy balance sheet. At the end of this year, its net debt is expected to be $2.5 billion, which translates to a net leverage ratio of 1.6x EBITDA. The company enjoys an A- credit rating with a stable outlook.
Furthermore, it is good news that analysts expect the company to improve its free cash flow to $1.1 billion in 2023, followed by another 22% increase to $1.3 billion in 2024.
Leo Nelissen
These numbers suggest a free cash flow yield of 5% to 6%, which supports the company's dividend and moderate future dividend growth - on top of investments to streamline the business without the need for external funding.
With that said, the valuation is fair, not undervalued. The company is trading at 16x 2024E free cash flow, which incorporates a substantial increase in free cash flow. Prior to the pandemic, HRL was trading at 16-17x free cash flow.
The same goes for the EBITDA multiple. 15.3x NTM EBITDA is fair but not undervalued - despite the stock's 25% decline.
Nonetheless, HRL isn't a bad stock. The company shines in times of subdued inflation and (often related) healthy consumer sentiment.
HRL doubled between the start of 2014 and the end of 2015 when the US economy entered a manufacturing recession. Rates and inflation were low, pushing investors into high-quality defensive stocks.
Hence, I would make the case that a high-quality consumer staple like HRL makes sense in a conservative dividend (growth) portfolio.
If I were in the market for more defensive exposure, I would be a buyer at current levels. However, I would start small and average down, as I believe that the stock has more room to fall to the $33-$35 range.
Upcoming Earnings
HRL releases its earnings on June 1, before the market opens.
After missing earnings by a substantial margin in 1Q23, the company is expected to see stabilizing earnings in 2Q23. The Wall Street consensus estimate is $0.39.
Estimize
Given recent developments, I believe that the risk continues to be to the downside, which is why I gave a buying range that lies below the current price. For example, Costco's (COST) earnings showed that consumers demand is shifting as a result of high costs and poor consumer health.
The Transcript
This could hurt Hormel, despite the fact that it's a consumer staple company.
Furthermore, peers like Tyson Foods (TSN) are having a hard time dealing with demand and supply headwinds.
If (not when) the company were to report bad earnings, followed by a significant decline in its earnings, I would be interested in buying if the company is able to comment on improving supply chain issues.
A post-earnings stock price decline could open the door to long-term buyers.
Takeaway
Hormel Foods is a conservative and defensive stock with a 2.9% dividend yield and a 57-year history of consecutive dividend hikes. While its recent stock performance has been weak, experiencing a 26% decline from its 52-week high, the company has outperformed many of its peers over the past ten years.
However, HRL has faced challenges, including volume declines and pricing struggles, leading to uncertainty and a decline in stock price. The company aims to improve its business by increasing meat availability, streamlining its product portfolio, and aligning services with customer needs.
HRL maintains a healthy balance sheet, and analysts expect its free cash flow to grow, supporting the dividend and moderate future dividend growth.
While the current valuation is fair, HRL can be a suitable addition to a conservative dividend portfolio during periods of subdued inflation and healthy consumer sentiment.
Potential investors may consider starting small and averaging down, as there may be more room for the stock price to fall.
This article was written by
Analyst’s Disclosure: I/we have a beneficial long position in the shares of PEP 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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (28)
I expect the price to stay in current range for a bit befoe deciding on the next move
With Dividends ReinvestedStart date: 01/02/2018 01/02/2018
End date: 05/30/2023 05/30/2023
Start price/share: $36.36 $112.11
End price/share: $38.33 $256.37
Starting shares: 275.03 89.20
Ending shares: 308.86 100.34
Dividends reinvested/share: $5.09 $18.26
Total return: 18.39% 157.25%
>>Average Annual Total Return: 3.17% 19.10%
Starting investment: $10,000.00 $10,000.00
>>Ending investment: $11,837.58 $25,724.06
Years: 5.41 5.41
www.dividendchannel.com/...>Life is short, eat dessert 1st!
I will hold off on adding $HRL exposure, if I have to bet, Q1 will disappoint those short-sighted folks not willing to sit through a rough patch in this market segment.Add on temporary headwinds (as with $TSN) should they arise, like you mentioned.
'the valuation is fair, not undervalued'
'maintains an extremely healthy balance sheet'Won't quote the real meat of the article, but the quips here reinforce why HRL is bought monthly in my portfolio, since '08. Again, thanks.Alex.