Hormel Foods (HRL) Dividend Stock Profile | Dividend Investor

Company Overview

Hormel Foods Corporation (NYSE: HRL) is a stalwart in the consumer defensive sector, a global branded food company with a history stretching back to its founding in Austin, Minnesota, in 1891. While many associate Hormel with its iconic SPAM® luncheon meat, the company's portfolio is a diverse and powerful collection of well-known brands that fill grocery carts and restaurant kitchens worldwide. Its products are marketed in over 80 countries and its brand roster includes household names like Skippy® peanut butter, Jennie-O® turkey products, Applegate® natural and organic meats, Hormel® Natural Choice® deli meats, and the recently acquired Planters® brand of nuts and snacks.

Operating primarily within the packaged foods industry, Hormel's business is structured across three main segments:

• Retail: This is the largest segment, supplying branded and unbranded food products to grocery stores and supermarkets. It includes the vast majority of the consumer-facing brands that people know and trust.
• Foodservice: Hormel is a major supplier to restaurants, hotels, hospitals, and other food service operators, providing everything from pre-cooked bacon and pizza toppings to specialized protein solutions.
• International & Other: This segment handles the sales of the company's products outside the United States, including exports and operations from its facilities in countries like China and Brazil.

As a consumer staples company, Hormel's business tends to be resilient during economic downturns. People need to eat regardless of the economic climate, which provides a stable baseline of demand for its products. This stability has been a cornerstone of its long-term success and its appeal to conservative, income-focused investors.

Dividend History & Track Record

When it comes to dividend investing, Hormel's track record is nothing short of legendary. The company is a member of the S&P 500's most elite group: the Dividend Kings. A Dividend King is a company that has not only paid but also increased its dividend for at least 50 consecutive years.

Hormel has an incredible streak of 58 consecutive years of dividend increases, a testament to its durable business model and unwavering commitment to shareholder returns. This means the company has raised its dividend through the high inflation of the 1970s, the dot-com bust, the 2008 Great Financial Crisis, and the COVID-19 pandemic. This level of consistency is exceptionally rare and is the primary reason HRL has been a core holding for dividend growth investors for decades.

The company typically announces its annual dividend increase in November, with the payment distributed quarterly. This predictable and rising stream of income is the bedrock of Hormel's investment thesis.

Key Financial Metrics for Dividend Investors

While a storied history is important, savvy investors must analyze the current financial health of a company to ensure the dividend's future safety and growth. Here's a look at the key metrics for HRL.

Dividend Yield

Historically, Hormel has been a low-yield, high-growth dividend stock. However, due to recent stock price underperformance, its dividend yield has climbed to levels not seen in over a decade. As of late 2023 and early 2024, the yield has hovered in the 3.3% to 3.7% range. This is significantly higher than its five-year average yield of around 2.2%. A higher yield can be attractive for income investors, but it also signals that the market has concerns about the company's growth prospects, which has pushed the stock price down.

Payout Ratio

The payout ratio measures the proportion of earnings paid out as dividends. A lower ratio is generally safer, as it leaves more cash for reinvesting in the business, paying down debt, or weathering a downturn. Hormel's GAAP earnings payout ratio has recently risen into the 70-75% range. This is elevated compared to its historical average, which was often closer to 40-50%.

Similarly, the free cash flow (FCF) payout ratio has also been high. This is a critical point of concern for investors. A high payout ratio, driven by stagnant earnings rather than aggressive dividend hikes, limits the company's financial flexibility and puts pressure on its ability to deliver robust dividend growth in the future.

Earnings and Revenue Growth

This is the root of Hormel's recent challenges. After years of steady growth, the company has faced significant headwinds. Revenue has been relatively flat, and earnings per share (EPS) have declined. Key factors include:

• Margin Compression: Soaring inflation on commodity inputs (pork, feed, packaging), labor, and logistics has squeezed profit margins.
• Operational Issues: The Jennie-O turkey segment has been severely impacted by recurring outbreaks of avian flu, which has disrupted supply and increased costs.
• International Weakness: The company has faced softness in its China market, particularly for its retail SPAM® products, and has had to navigate a complex post-COVID recovery.
• Shifting Consumer Demand: While Hormel is adapting, long-term shifts towards fresh and private-label foods present a persistent challenge.

Debt Levels

Hormel has traditionally maintained a fortress-like balance sheet with very little debt. However, the $3.35 billion acquisition of the Planters brand in 2021 was funded with a combination of cash and new debt. While the company's debt-to-EBITDA ratio remains manageable (typically below 3.0x), it is higher than its historical norms. Management is focused on paying down this debt, which is a prudent use of cash but also competes with other priorities like capital expenditures and dividend growth.

Dividend Growth Analysis

The story of Hormel's dividend growth is one of significant deceleration. While the 58-year streak of increases is intact, the rate of those increases has slowed dramatically.

Let's look at the Compound Annual Growth Rate (CAGR) of the dividend over different periods:

• 10-Year CAGR: Approximately 13.5%
• 5-Year CAGR: Approximately 7.9%
• 3-Year CAGR: Approximately 5.5%
• 1-Year Growth (Most Recent Increase): Approximately 2.7%

The trend is undeniable. The double-digit growth that investors had come to expect is a thing of the past, at least for now. The most recent increase was the smallest in percentage terms in over a decade. This slowdown is a direct consequence of the earnings pressure and high payout ratio discussed earlier. Management is prioritizing the streak but is being very conservative with the size of the increase until the business fundamentals improve.

For investors using platforms like DripEdge to track their portfolio's dividend income, this slowdown is a critical data point. Simulating future income based on a 2-3% growth rate versus a 10% rate yields vastly different results over the long term.

Risks & Considerations

Investing in Hormel today requires a clear understanding of the risks that could impact its dividend and total return.

• Sustained Margin Pressure: If Hormel cannot effectively manage costs or pass on price increases to consumers without destroying demand, its profitability will remain challenged, further constraining dividend growth.
• Integration of Planters: While strategically sound, the Planters acquisition needs to deliver on its promised synergies and growth. Any stumbles in integrating this massive brand could weigh on financial results.
• Competitive Landscape: The packaged foods industry is fiercely competitive. HRL competes with giants like Tyson Foods, Conagra Brands, and Kraft Heinz, as well as agile private-label brands that can be more price-competitive during inflationary times.
• Commodity Volatility: As a protein processor, Hormel is exposed to the volatile prices of pork, beef, turkey, and feed grains. Events like animal diseases (avian flu, African swine fever) can have a significant and immediate impact on earnings.
• Valuation Trap: While the stock price is down and the yield is up, investors must determine if this represents true value or a "trap." If earnings continue to stagnate or decline, the stock price could remain depressed for an extended period, even if the dividend is maintained.

Is HRL a Good Dividend Stock?

Answering this question depends heavily on the investor's profile and expectations.

For the dividend growth investor seeking 8-10%+ annual dividend increases, Hormel is likely no longer a suitable candidate in the short to medium term. The fundamental picture simply does not support that level of growth right now. The days of rapid dividend compounding are on hold.

For the dividend income and safety investor, the case is more compelling. HRL offers a historically high yield from a blue-chip Dividend King in a defensive sector. The dividend itself is not at risk of being cut; the company's culture and financial priorities are built around maintaining and gradually increasing the payout. For those who prioritize a safe, reliable, and growing-above-inflation income stream, HRL could be an attractive option at its current valuation.

Ultimately, Hormel Foods is a high-quality company navigating a period of significant operational and economic challenges. The investment thesis has shifted from "growth and income" to primarily "income and safety." An investment in HRL today is a bet on a turnaround. It's a belief that management can successfully navigate the current headwinds, restore margin growth, and eventually return the company to a path of more robust earnings and dividend growth. Investors should monitor key metrics like organic volume growth, operating margins, and the payout ratio to track the progress of this turnaround.

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Disclaimer: The information provided is for educational and informational purposes only and does not constitute financial, investment, or legal advice. DripEdge is not a registered investment advisor. Past performance does not guarantee future results. Always do your own research or consult a qualified financial professional before making investment decisions.