Dividend Aristocrats

Hormel Stock; a 54 Years Dividend Aristocrat

Hormel Stock has paid a record 54 years of consecutive dividends and is an elite member of the S&P 500 Dividend Aristocrats. To be a dividend aristocrat, a company must have not only paid dividends for 25 years but raised them each year, without missing even one. As of 2019, there are 57 such companies.

Hormel Foods is not a sexy stock; however it has handily out performed the S&P 500 over the last decade. It is a kind of a boring stock that rewards shareholders with appetizing dividends every quarter.

In this article, we review the company’s latest financial results as of 4th Quarter of 2019, growth forecast and guidance, dividend growth history, valuation and performance relative to S&P 500.

Business Synopsis

Founded in 1891 by George A. Hormel, Hormel Foods is a producer of a range of meat, pork and food products sold in 80+ countries worldwide with a US household penetration of 81%. The company markets high-quality nutritious food brands that make it one of the most trusted food companies in the world.

Management is diversifying the business model and emphasis is now on selling value-added consumer items rather than just meat and pork. Some of the company’s top selling brands include Pepperoni, Deli Turkeys, packaged Bacon, Ham Snack Trays, Beef/Sausage/Chicken Hash, Packaged Mashed Potatoes and Macaroni and Cheese, etc.

Employing 18,800 people, Hormel Foods has a mission statement to transform the future of food by creating healthy nutritious foods that consumers will enjoy. From a recipe concept to final packaging, the company ensures the food quality is high standard, safe and nutritious.

Hormel Food’s SPAM brand has a cult following in Hawaii and across the world. CNBC produced a video showing why SPAM canned meat is so popular in Hawaii such that it is celebrated every year on the streets.

Hormel Foods sells all food brands through 4 distribution channels. They are:

Channel #1: US Deli – Accounts for 10% of net 2019 sales. Deli stands for “delicatessen” originating from Germany and refers to ready-to-eat food products like cooked meat or salads that are sold in retail shops.

Channel #2: US Food Service – Accounts for 31% of net 2019 sales. Food services refers to food that is consumed outside of the home in locations such as hotels, restaurants, cinemas, airports, hospitals, or schools.

Channel #3: US Retail – Accounts for 52% of net 2019 sales. Walmart is Hormel Food’s biggest customer accounting for 13.5% of total 2019 revenues.

Channel #4: International – Accounts for 7% of 2019 sales and is sold through retail channels in countries like Australia, Brazil and China.

Revenue Analytics & Share Buybacks

For full year 2019, Hormel Foods generated $9.49 billion in revenues and earned a net income of 978.8 million, implying a net profit margin of 10.3%. Revenue dipped 0.5% year over year from 2018’s sales of $9.55 billion.

Over the last decade, Hormel Foods has grown its revenues from $6.53 billion in 2009 to $9.49 billion in 2019, a compounded annual growth rate (CAGR) of 3.8%. The company has grown its earnings per share at a much better compounded annual growth rate of 11.1%.

Trading on the New York Stock Exchange, Hormel Foods has a $23.66 billion market capitalization and pays a dividend yield of 2.1%. This is in line with the dividend paid by the S&P 500, which is 1.9%.

90% of Hormel Food’s revenues come from the United States. This leaves huge opportunity for international expansion. The company is making inroads in countries like Australia, Brazil, China and Japan.

Since 2013, management is taking steps to evolve the company from a commodity oriented enterprise primarily selling meat, pork and turkey to a globally recognized food brand with healthier and nutritious pre-cooked meals that drive high margins.

Management is rewarding shareholders not only by growing its dividend at a 16% compounded annual growth rate (CAGR) over the last decade, but also by buying back shares. Below is a graph from the company’s Investor Presentation showing stock repurchases each year since 2009. Year to date in 2019, HRL Stock has repurchased $170 million worth of stock.

Growth Outlook

In 4th Quarter, 2019 earnings results, Hormel Foods reported sales of $2.5 billion, down 1% year over year. Operating income came in at $320 million, up 1% year over year. Operating margin improved by 10 basis points to 12.8%. Management has raised its guidance for full year 2020 results. The reason for the revenue decline is the divestiture of Cytosport; the maker of muscle milk that was sold to Pepsico for $465 million.

Volume and net sales for refrigerated foods is up 1% and 4% respectively thanks to strong demand for pre-cooked Hormel Bacon, pizza toppings, Applegate organic meat, party trays, etc.

Revenue for 2020 is expected to come in the range of $9.5 billion to $10.3 billion while earnings per share is expected between $1.69 to $1.83. The CEO Jim Snee mentions the company’s top selling brands and growth in deli and foodservice business. He quotes, “In 2020, we expect to grow operating income as we did in 2019 while also growing sales.”

“We are excited about our growth prospects in foodservice, retail and deli, led by brands such as SPAM® , Wholly® , Jennie-O® , Hormel® Natural Choice® , Hormel® Gatherings® and Applegate® . We are also putting a lot of energy behind our recent innovations in brands such as Herdez® , SKIPPY® , Columbus® and Hormel® Bacon 1TM. I am confident we have the right strategy, business model and leadership team to continue delivering long-term sustainable growth.”

Hormel Foods plans to grow organic sales by 2 to 3% in the next few years  and profit growth between 5% to 7%. Some of the catalysts that will help achieve this are continuing the strong growth momentum in deli and food services business, grow its Mexican food business, as well as sell products in Brazil and China.

Hormel Foods is also growing by making acquisitions that are high margin in nature. Over the last 3 years, the company has invested $1.4 billion and acquired $640 million in revenues. Some of the brands acquired include Fontanini which is a maker of Italian sausages and meats, and Columbus deli meat as well as Ceratti which produces sausages and salami in Brazil.

Dividend Growth History

Hormel Foods is a dividend aristocrat that has raised its dividends continuously for 54 years without missing even a single one. With dividend data available from their Investor Relations website, management has grown its dividend from 3 cents in 1990 to 84 cents in 2019. This represents a stunning 11.75% compounded annual growth rate over the last 30 years.

Attached chart shows a steady uptrend in Hormel Food’s dividend growth history. Since 2010, the chart looks to have gone parabolic in a huge uptrend. The reason for this is management is growing dividends at a faster rate.

Below is another chart showing the company’s year over year dividend growth since 1990. Management grew its dividend over 20% in 2011 and 25% in 2013; a stunning growth rate.

Dividend Payout Ratio

Lets examine the the dividend payout ratio for Hormel Foods Stock. Dividend Payout Ratio measures how much of a company’s free cash flow is paid out in the form of dividends.

Free cash flow is the cash a company generates from its daily operating activities minus capital expenditures like investing in new plants or equipment.

Free cash flow is calculated from the statement of cash flows, and is not artificially modified using accounting rules or non-cash expenses like depreciation, amortization, fair value revaluations, etc.

In its 2019 annual report, the company states cash from operations equals $923 million while capital expenses totaled $290 million.

Free Cash Flow = Cash from Operations – Capital Expenditures

= $923 million – $290 million

Free Cash Flow = $633 million

Dividends Paid in 2018 = $437 million

Dividend Payout Ratio = Total Dividends Paid / Free Cash Flow

= $437 million / $633 million

Dividend Payout Ratio = 69%

A dividend payout ratio of 69% is neutral; we would consider this dividend easy to maintain and safe for investors to trust.

Valuation and Long Term Performance

Attached is a long term monthly chart of Hormel Foods Stock (HRL). Hormel Foods Stock has grown from $2 in January 1990 to $44.25 as of January 2020. This is an impressive 11% compounded annual growth rate in 30 years.

During the great financial crisis of 2008 when the S&P 500 dropped 56%, Hormel Foods Stock fared better and only dropped from $10.5 to $6.5, representing a 38% draw down.

Attached is a 10 year comparison of Hormel Foods Stock to that of the S&P 500. This dividend aristocrat has handily beaten the S&P 500 by a wide margin. Over the last decade while the S&P 500 has gained 190%, Hormel Foods has gained a stunning 455%. HRL Stock is in red line while the S&P 500 is in blue.

In terms of valuation, the S&P 500 trades at 18.2 times forward earnings as measured by price to earnings ratio. Hormel Foods trades at a premium of 25.3 times 2020 earnings.

We believe this valuation is very expensive and do not recommend buying the stock at these levels. However, a 10% to 15% market correction would present an excellent entry point for long term investors in this stock.

Executive Summary

Here is what we like and don’t like about Hormel Foods Stock.

Likes

  • Consistent dividend growth for 54 years, making this a Dividend Aristocrat.
  • Impressive 16% dividend growth rate over the last decade.

Dislikes

  • Dividend payout ratio of almost 70% which is at the higher end of the range.
  • A valuation premium to the S&P 500. Trades at 25.3 times forward earnings while the S&P 500 trades at 18.2 times.
Market Capitalization $23.66 billion
Dividend Yield 2.1%
Forward PE Ratio 25.3 times earnings
Dividend Growth (5 Year Avg.) 16%
Dividend Payout Ratio 69%
EPS Growth (5 Year Avg.) 10%
2018 Revenues $9.49 Billion
Gross Margin 19.8%
Net Margin 10.3%

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