Lanny’s Recent Stock Purchase – Hormel Foods Corp. (HRL)

The consumers staple industry is always highly sought after by dividend investors.  They typically are companies that have been around for many, many years that date back even before our time.  As dividend investors, we love companies that make products that are widely consumed by majority of the populations, at least in developed countries, but also those that have plans to expand to those countries not as developed.  Growing up, I loved pepperoni, chili and other types of food.  A brand sticks out to me that serves both up, as well as is expanding into the food conscience society we live in now and that major player is Hormel Foods Corp. (HRL).  On October 19th, I purchased shares into this perfectly tasteful pepperoni making company!

The Stock – Hormel Foods (HRL)

Hormel has been around for more than 125 years.  From Google Finance, “Hormel Foods Corporation is engaged in the production of a range of meat and food products. ”  Further, from their homepage, “Bringing high-quality branded products that are flavorful, nutritious and convenient puts us among the most trusted and well-known food companies in the world. Making sure those products have an extra helping of inspiration is what sets us apart. Over 30 of our brands are No. 1 or No. 2 in their categories and our products are marketed in more than 75 countries, including China, Japan, Australia, South Korea and the Philippines. We have continued to grow our family of brands with the recent additions of CytoSport, Applegate and Justin’s. Adding these companies to our existing broad portfolio of iconic brands keeps our company strong and on trend with today’s consumers.”  That is pretty impressive.  They have OVER 30 brands that are number 1 or 2 in respective categories in more than 75 countries.  That is not an easy feat, whatsoever.  This is a feat that allows them to increase their dividend for 51 straight years, and counting, might I add.  Since I am a dividend investor, why don’t we throw Hormel (HRL) through our Dividend Diplomat screener for good old sake. 

Dividend Diplomat Stock Metrics

1.) Price to Earnings (P/E) – The price point at the purchase date was $30.47.  According to analyst estimates for the year, they are expecting $1.57 earnings per share.  Based on that price point and these earnings expectations, the price to earnings calculated to be 19.4, slightly on the higher side, but below the S&P 500 p/e ratio of 25.64.  Further, next year earnings expectation is $1.68 according to analysts (all 11 of them), which calculates a forward ratio of 18.14, which is more palatable as well.  Under 20, consumer stock AND they were trading at their 52 week low?  I like it.

2.) Dividend Yield – Hormel currently pays $0.68 per year or $0.17 per quarter.  At the time of purchase, the yield calculated out to be 2.23% (dividends divided by share price).  This is definitely below my portfolio average yield, but was 34 basis points higher than the S&P 500 yield of 1.89%.  Not the greatest yield, but I haven’t seen Hormel at this yield in quite some time.  A dividend aristocrat with an above average of the S&P yield?  Sounds good to me.

3.) Dividend Growth Rate –  Hormel has paid dividends and increased them for over 51 years!  That is impressive, first off.  Secondly, their five year dividend growth rate is a staggering 17.84%, partly due to the lower yield that they have.  Incredible.  Their most recent increase also came in at 17.2%, which is consistent with their 5-year track record.  They have an announcement coming up at the end of November, which is their typical dividend increase month.  We shall see what fruit the tree bears.  Find out why the dividend growth rate is extremely powerful.  Now with such a great growth rate, one would think the dividend payout ratio would mean something for Hormel.

4.) Dividend Payout Ratio – As discussed in #2, the dividends paid per year amounts to $0.68.  From #1, their earnings per share for 2017 (expected) is $1.57.  The dividend payout ratio equates to 43% (0.68/1.57), which is in my favorite sweet spot of between 40% and 60%.  This allows ample room for steady dividend growth going forward and protects them from any severe crisis or poor performance year.  This is a positive point, given Amazon’s (AMZN) entry into the food market.

To show proof of the purchase:

I purchased $1,499.98 worth at $30.47 per share for a total of 49 shares, with a $6.95 trading fee.  This added $33.32 to my forward dividend income.  Very excited for ANOTHER dividend aristocrat to be added to my dividend portfolio, especially as I recently crossed the $300,000 mark and am inching towards my year end goals, as you can see from my Quarter 3 goal update.

Hormel Foods Corp. (HRL) Stock purchase summary & conclusion

This is another NEW addition to my portfolio and I am very excited about the dividend growth metrics.  This marks the 11th purchase this year and pushes me towards the dividend goal.  I always see my friends and family member have a product or two in the cupboard or out for parties, those party trays are fantastic.  The history of the company, the dividend history and dividend growth is really getting me excited for November!  Did I mention that this was purchased the day before their ex-dividend date?  Damn right, this was a very lucky timed investment purchase, as I will capture the last dividend of the year!

Now onto the readers, what do you think of this dividend stock purchase?  Do you like it?  Are you staying away from consumer food companies due to Amazon (AMZN) and/or the ever changing customer preference?   Would you buy at this price?  I appreciate the feedback and insight you have on this investment decision!  Thank you again, everyone, good luck and happy investing!

-Lanny

Facebooktwittergoogle_plusredditpinterestlinkedinmail

36 thoughts on “Lanny’s Recent Stock Purchase – Hormel Foods Corp. (HRL)

  1. Hi Lanny,
    HRL is probably one the favorite stocks in the dividend investing community. I also just bought them one week ago, really like their dividend history and current valuation. The pay out ratio leaves as well enough room for future growth.
    All in all a great investment!!

    Cheers
    Andy

    • Andy –

      Appreciate the comment sir! So pumped to add another aristocrat to the portfolio, with a legacy name. They have impressive years of dividend growth, with an even more impressive dividend growth rate to boot. Excited to see what they announce in November, that’s for sure!

      -Lanny

  2. Great purchase from a monetary standpoint! However, as I’m a vegan, I couldn’t consciously invest in Hormel. A caveat to that statement is, no I’m not certain that some mutual funds I hold don’t include companies like Hormel, Tyson, McDonalds, Darden restaurants etc.
    What do you guys think of “ethical investing”? I think I feel a new post coming on (and would value your opinions)!
    Congrats on getting in on the last 2017 dividend , too! Great timing.

    • Linda –

      Respect that you are a Vegan. I tend to not eat dairy/poultry mostly throughout the weak, but I’ll have the pizza and poultry, but I can see your points from what you choose to invest in. They do have a few other brands within their portfolio – such as their guacamole, etc..

      As for ethical investing – you can def. find a way to do so, however, not many companies out there from a dividend investor standpoint that are entirely ethical, you know? Have you performed the research and buy only those types of entities? Talk soon!

      -Lanny

  3. I also added this past week to my HRL position and right before ex date to capture that dividend. The sector is being unloved but that’s fine with me I just keep adding and averaging down as well collect that dividend. Another double digit increase should be coming soon for January payout. In the consumer sector check NWL as well I’m sure you’ll find value in it and will be interested in your thoughts as well. Thanks for sharing!

    • CD –

      NICE! Love the well timed purchase, always. I will have to check out NWL, now that you mention it, you have me intrigued. Looking forward to HRL’s dividend increase announcement next month!

      -Lanny

  4. Thank you for reminding me about HRL.

    I did a deep dive watch list earlier this year and identified a bunch of stocks to keep an eye on, and HRL was one of the ones that floated to the top. Then I kind of forgot about it. Probably because the options market is pretty thin and I’ve been focusing on acquiring stocks through option assignment this year.

    51 years of increases is pretty impressive. I especially like how conservative the balance sheet is.

    I don’t follow your comment about how AMZN might affect HRL’s future prospects? Hormel is a food processor while Amazon is getting into the grocery store space. Yeah they’re both “food” related but those are pretty different industries.

    Maybe you were referring to the trend for grocers to offer more and more white label products to compete with name brands? That is worrisome for HRL. But they were going to have to deal with that regardless of what Mr. Bezos does. That headwind isn’t going away.

    Congrats on a great stock purchase.

    • Catfish –

      Yep, have to deep dive these aristocrats when they are on sale! And yep – that is exactly what I was referring to – Amazon being able to offer lower prices compared to Hormel and/or potentially offering “Amazon” branded products that are steeply discounted compared to Hormel – that’s my concern right now, but not sure if they’re planning to go that route. They did this within the electronics industry (Chargers, HDMI cords, etc..), and damn, if they step into the production game or have an entity that’s low cost to them to slap their label on, could shake more than just the foods industry.

      Check them out and hopefully you will consider them for the future : )

      -Lanny

  5. Oh man, it’s like every other financial blogger I know, is buying HRL and GIS.

    Regarding “the most trusted and well-known food companies in the world”
    Well-known maybe, but most trusted? I don’t think so. I wouldn’t eat anything that comes out of their factory or labeled as ‘Natural’.

    As for the stock, I wouldn’t compare it to S&P 500 valuation, instead I would compare it to something like XLP or to the industry. The top 10 companies in S&P 500 are mostly high flying technology companies like Apple, Google, Microsoft, and even Amazon (consumer discretionary) which have caused the bulk of expansion in S&P 500’s valuation. Therefore, in my opinion, S&P 500 valuation is not a good comparison for a consumer staple company valuation or a justification for buying it.

    Now, if you compare HRL to its industry, you will find out that it is expensive relative to the industry (19x vs. 15x). Therefore, people who are buying HRL at the current price, are buying an expensive stock with a measly div yield and a very negative market sentiment/momentum. Not to mention an increasingly growing negative process food trend, which can’t be good for HRL and like.

    As a dividend investment, I hope it works out for you and the other folks who are buying it, but I can’t cheer for the company or its stock.

    Mr. ATM

    • ATM –

      Appreciate the thorough comment. I know the blog-o-sphere is blowing up with HRL purchases.

      As for the industry – what data will/are you using? Morning star shows the industry P/E at 25.2? I hope morning star isn’t wrong! Their link: http://www.morningstar.com/stocks/xnys/hrl/quote.html <-- but then again, I could be fooled.For a dividend investment - I don't see signs, yet, that point to this not working out well? However, there is always the potential with every company, in that case. I am curious, though, on how their products play well with the new generation coming in, i.e. the 12-24 year-old age group, as they are far-more health consience, but that's not to say our generation isn't!-Lanny

      • Lanny,

        I was using Zack’s investment report which calls HRL stock a bit overvalued on a P/E (TTM) basis (19.8x vs 15.8x) when compared to the industry. Also, FastGraphs is indicating HRL slightly expensive based on its Normal P/E of 18.3.

        It seems stock has more room to go down.

        Mr. ATM

    • LOL…According to google finance, HRL’s “industry” is “animal slaughtering and processing” (https://finance.google.com/finance?q=NYSE%3AHRL&ei=bFrtWfGZB4To2Ab9ta3oBA), which is probably what M* is referring to when they say that the “industry” P/E is 25.2 (http://financials.morningstar.com/valuation/price-ratio.html?t=HRL&region=usa&culture=en-US)

      You brought up XLP which is a consumer staples index ETF (BTW…Non-cyclical consumer goods is the SECTOR not the INDUSTRY)

      Within that XLP index, HRL is a whopping 0.54% weight (http://www.sectorspdr.com/sectorspdr/sector/xlp/holdings).

      That is number 33 out of 34 in the index…so probably just as useless as comparing to Mr. SPYder.

      Personally I don’t give much credence to P/E because earnings are imaginary. But if you want to compare a P/E, why not compare to HRL’s 5 year average, which is 22.8?

      As dividend investors, yield is really what we care about right?

      HRL 5yr average yield is 1.6% compared to the current 2.2%.

      Granted, “valuation” is arbitrary and capricious, but by many reasonable metrics the HRL valuation is “low” or at least “fair”. Now Mr. Market may be correctly valuing future earnings or overreacting. Time will tell.

      The dividend may be “measly” (less than 2.5% I guess??), but it is extremely safe and it’s growing.

      Not only does it have room to grow based on the company’s balance sheet and free cash flows, but management has demonstrated a legacy of commitment to growing it. It’s kind of a poster child for a DGI stock, so that’s probably why it’s all over the DGI blogosphere.

      Just because you don’t eat spam doesn’t mean it’s a bad stock.

      Lanny is too polite to call out a BS comment, but I’m not. This is a sound dividend growth investment.

      Period.

  6. Hi Lanny,
    That sounds like a safe investment indeed. Increasing dividends for 51 years already – I don’t think it is going to stop soon! I think that market’s reaction to anything that is related to recent Amazon’s step into the food sector is overreaction. Unless we are missing something else. Congrats on adding another great dividend company to your portfolio!
    -BI

    • BI –

      I agree, I don’t think they will stop the streak, nor do their metrics point to that occurring either. I think price compression is occurring across the board, as brick & mortar stores are competing with the electronic market place to encourage customers to still walk in. I may be crazy though ; )

      -Lanny

  7. Like the buy a lot. HRL is fairly new to my portfolio. Less than a year but I’m looking to add to it this month. Still have not made my October buy but HRL, GIS and maybe HCP are on my list of potential(s). Thanks for sharing.

    • DH –

      Obviously I am with you, as it is brand new to my portfolio : ) GIS has to have a better yield for me, given their recently small dividend increase announcement this year. I’d like to see them at or above the 4% mark. I may add more to HRL on a drop to the mid $28’s.

      -Lanny

  8. HRL has been on my list for a while but I think the price wars in grocery are only just starting and that’ll hit all the brand name producers in the short term. I don’t think it’s the Amazon effect although people are quick to blame that but Walmart, Target, Costco, Kroger, etc. are all pushing prices down in order to compete with each other.

    • Time –

      Thank you very much for the comment. I agree on the price compression, which I am sure is then trickling it’s way to the producers – impact margins across the board. It’s an interesting environment we are in, to say the least.

      -Lanny

  9. Lanny,
    I really like HRL at these prices. Their consistent and conservative management leaves tons of room for future payout growth. Plus they have been proactive buying brands and names that the youngins like – I should know, I recognize most of their new product lines…
    – Gremlin

    • Gremlin –

      Appreciate it and there’s a lot of love on this post related to the purchase. They do have ample room for growth and November will be an anticipated event for when they increase it. And nice that you recognize their brands, I know the “REV” line was catered towards the younger on the go individuals. Pumped for what’s to come.

      -Lanny

  10. Solid buy. The consumer staple stocks have not performed well recently due to the reasons you mentioned (Amazon and slow reactions to changing consumer preferences). I have looked at Hormel on a couple of occasions, but never pulled the trigger. I think it is a good time to buy into this sector and Hormel is a good choice based on your analysis. Thanks for putting it together. Tom

    • Tom –

      Thank you and no they have not haha, and it continues this week. What’s funny – I realized I reviewed HRL pretty thoroughly back at the end of March and they were at $34 and change. In that article, I specifically they said they would have to drop at least 10% to consider them for investment and… boom haha.

      Of course Tom, I hope the stats above help!

      -Lanny

  11. Always a big fan of HRL. Would love to add to my position to lower my cost basis. HRL has been getting a lot of attention over the past few months. Lower yield, but high dividend growth so should be a solid hold long term. Nice buy!

    • Daze –

      A lot of attention it has, I can’t count on my hands the number of purchases I have seen as of late. After this dust settles, I am very eager to read their announcement next month for their dividend, to see if they carry the same track record as the past shows.

      -Lanny

  12. I definitely like the purchase Lanny, which is why HRL is in my portfolio. It’s hard to argue with the impressive dividend history and economic moat that HRL has. I too am not a fan of their dividend yield, but over time, given the likely growth on dividends, the long term yield would be more impressive than it is today.

    • DP –

      Thank you for the post and I agree on the dividend history + room that they have for growth. I believe if their growth is consistent with what they’ve done, their yield will be okay to maintain. Looking forward to November’s announcement.

      -Lanny

  13. Hormel is a great company! I think it’s a fantastic purchase, especially in the LT. I have 100ish shares myself personally. Unfortunately the cost basis is above $35. Maybe I’ll buy some additional shares to bring my average cost basis down.

    -CD

Leave a Reply

Your email address will not be published. Required fields are marked *