Monday, November 27, 2023

Hormel Foods Dividend Stock Review

Hormel Foods Corporation (HRL) develops, processes, and distributes various meat, nuts, and food products to retail, foodservice, deli, and commercial customers in the United States and internationally. The company operates through four segments: Grocery Products, Refrigerated Foods, Jennie-O Turkey Store, and International & Other. 

The company increased dividends by 2.70% to $0.2825/share. This marked the 58th consecutive annual dividend increase for this dividend king. Having the ability to grow dividends for 58 years in a row is not a small accomplishment. In fact there are less than 40 companies in the US which have accomplished that.

Unfortunately, this is the slowest pace of annual dividend increases for Hormel since 2009. I took a look at the annual dividend increases for Hormel, going back to 1990 to observe that. I find it helpful to review trends in dividend increases over time.

You can also see that the pace of annual dividend increases for Hormel has been decreasing over the past four years. This is why the 5 year annualized rate of dividend growth is 8.90%, while the ten year annualized rate of dividend growth is 13.20%.

I still like viewing the growth in annual dividends per share. However, we need to do some more digging beyond that (per usual).

First, we need to take a look at the trends in earnings per share over the past decade.  You can see that Hormel was able to grow earnings per share from $1/share in 2013 to a high of$1.91/share in 2018. For the next 4 - 5 years however, the company has been unable to increase earnings per share above $1.91/share. I am also including forward earnings estimates of $1.63/share for 2023.

If you take a step back, you may notice that the company has basically been unable to grow earnings per share in any meaningful way since it earned $1.68/share in 2016. Without growth in earnings per share, there is a natural limit to growth in dividends per share and growth in the intrinsic value of the company.

You can also observe the relationship between earnings per share, valuation and share prices over the past decade. The stock is basically where it was five years ago or so, mostly because earnings per share have been flat, and the valuation multiple shrank to a more reasonable level at around 20.

The share price was at $21.73 at the start of the study period, which translated to a P/E ratio of almost 22. By 2018, when we achieved record earnings for the decade, the share price was at $43.64, which translated to a P/E ratio of 23. 

At extreme highs in 2016 and 2022, the stock sold as high as 34 times earnings and 33 times earnings. That translates to as high as 27 - 30 times forward earnings.

Even at the lows in 2017, the stock didn't sell materially below 20 times earnings. In my opinion, without growth in earnings per share, future dividends and growth in intrinsic value would be limited. You would likely see the stock in a range, with majority of gains driven by valuation multiple changes and whatever dividends that are paid to shareholders. My goal is to find companies that can grow earnings, dividends and intrinsic values over time, and buy them at a decent entry valuation. Timing valuation changes only is not a game I try to play.

If the company managed to grow earnings per share from here however, it may do well for shareholders who consider it today. 

Second, we need to take a look at trends in the dividend payout ratio. You can see that the dividend payout ratio was largely in a range below 40% - 45% before 2017 - 2018. You van see that the dividend payout ratio has been increasing to over 55% by 2022. At the same time earnings per share were basically flat over the last 4 - 5 years.

As a result, the growth in dividends per share since at least the past 4 - 5 years has been a direct result of the company paying a larger share of earnings as dividends. Unfortunately, there is a natural limit to the dividend payout ratio, so the closer you get to 100%, the lower the company's ability to grow dividends over time. The increase in the payout ratio basically explains why dividend growth has been decreasing. If the company is unable to grow earnings per share over time, it may even be unable to increase dividends at all, thus losing its status of a dividend king in a few years.

The forward dividend payout ratio is close to 69% right now, which seems high.

However, if the lack of increase in earnings per share is only temporary, and it resumes in the future, then the company would be able to grow dividends over time and reduce the payout ratio. We have to wait and see.

Next, I also took a look at the trends in shares outstanding for Hormel. You can see a slight increase in shares outstanding over the past decade to about 545 million shares.

Overall, the stock sells for 20 times forward earnings today and yields 3.45%. The dividend has a decent coverage rate today out of earnings. Unfortunately, the lack of earnings growth over the past five years or so gives me pause before considering buying today. If the company can manage to grow earnings per share out of this 5 year slump, then it would likely do well for shareholders.

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