Hormel Foods (HRL 1.60%) is a Dividend King offering a historically high 3.6% dividend yield. It appears to be on the sale rack right now, and a few years from now, long-term dividend investors will probably wish they had bought it. Here are four reasons why you should consider adding Hormel to your portfolio despite the headwinds it is facing today.
1. Hormel has an insider that thinks like you
Companies answer to their investors. In theory, that should mean they make decisions that are in the best long-term interests of their investors. However, most companies know that their shares are owned by large institutions and asset management shops. So, the interests of small investors can often be overlooked. That’s not likely to happen at Hormel.
Image source: Getty Images.
The Hormel Foundation controls roughly 46.8% of Hormel’s stock. It was created by the founding family to ensure that Hormel would remain an independent company and support the local community in a philanthropic way. The stock control handles the first task; the dividends that Hormel pays are used to fund the second task. Or, to put it more simply, The Hormel Foundation wants Hormel, the food maker, to pay a sustainable and growing dividend over time. And Hormel, the food maker, has no choice but to listen because The Hormel Foundation is its largest shareholder.
The best part of this, however, is that The Hormel Foundation’s goal is likely to align with your own, assuming you are a conservative long-term dividend investor.
2. Hormel has a great track record
Hormel is run for the long term, which is great. However, even better, Hormel’s long-term success is really impressive. As noted, the company is a Dividend King. The dividend has been increased every single year for 58 consecutive years. That’s not something that happens by accident; it requires a strong business model that is well executed over time. Given the involvement of The Hormel Foundation, it probably isn’t shocking that Hormel is a Dividend King, but the proof of success is still nice to see.
HRL data by YCharts
3. Every company goes through tough times
That said, even the best companies in the world face periods where they underperform. That’s just the normal business cycle at work. Clearly, Hormel has had to deal with some tough periods over the past 58 years. That span includes the raging inflation of the 1970s, the Dot.com bust, the Great Recession, and the COVID-19 pandemic, just to pick some notable highlights. It muddled through them all, with the exception of the pandemic impact, which is a lingering headwind right now. Given the history, though, there’s no particular reason to believe Hormel won’t muddle through again.
4. The list is long, but the problems are all manageable
What is wrong today that has investors so worried about Hormel while the stock’s yield is near historic highs? There’s a list. The company has had a difficult time passing inflationary input costs on to consumers, the avian flu has been more difficult than usual, China’s pandemic recovery has been slower than expected, and Hormel bought the Planters brand right when the nut segment of the snacking niche started to slow down.
That is a long list, and it is understandable that investors are concerned. However, none of the issues is, individually, a company killer. Each one will either resolve itself or will be dealt with in time. The near-term impact of the collection, however, is weak financial results, which isn’t good news. But Hormel isn’t sitting around and waiting for better days. It is taking action.
For example, cost-cutting efforts that had to be put on hold during the pandemic are now back up and running. The company is leaning into innovation to help boost demand in the U.S., China, and specifically for the Planters brand, which didn’t see much innovation under the former owners. Notably, innovation is a key historical strength for Hormel. There’s no reason to believe that this lever can’t be used to reinvigorate consumer demand again.
The real problem here is that solving the current slate of problems will take time, and Wall Street is looking for quick results. A quick recovery isn’t in the cards at Hormel, but that’s exactly why long-term dividend investors have the opportunity they have in front of them. If you can handle collecting a large yield while you wait for Hormel to muddle through another difficult period, then this stock could be a great addition to your income portfolio.
Hormel is different today, but the goal is still the same
To be fair, Hormel has changed over the last decade or so, going from a meat producer to a branded products company. So, this isn’t the same business it was before. However, the goal of steady long-term business growth, supporting reliable dividend growth, hasn’t changed. It is possible that Wall Street is reevaluating the stock and placing a lower valuation on the shares because of the changed business. Or it could just be investors thinking short-term, creating an investment opportunity for long-term income investors.
The interesting thing is you can pretty much win either way. If this is a revaluation, then you are buying with a historically high yield that becomes the new normal yield. Hormel is still a well-run company that pays a large and reliable dividend. If investors are underestimating Hormel’s ability to return to a faster growth path, then you will get a high yield and capital appreciation when Wall Street catches up to Hormel’s improving performance.
