Hormel Foods raises dividend 17%, but trades at a premium P/E

Hormel Foods’ (NYSE:HRL) dividend was increased by a solid 17% last week. Its overall yield is 1.92%. The firm has paid a dividend since February of 1993.

Hormel Foods Incorporated is a global maker and marketer of consumer-branded meat and food products. Hormel manufactures and distributes a wide range of basic food products primarily in the meat segment including Spam,  Jennie-O Turkey, Little Sizzlers, Cure 81, and Chi Chi’s. Poultry products like turkey and perishable account for the majority of sales. The firm distributes products to supermarkets and independent food stores across the United States and maintains a smaller international presence. Hormel Foods was founded in 1891 and is based in Austin, Minnesota.  One item of note is that Jeffrey M. Ettinger retired as chief executive officer on October 30, 2016. Ettinger will continue to serve as Hormel Foods chairman of the board. The Board of Directors elected James P. Snee to be the company’s next chief executive officer, effective October 31, 2016.

Hormel Foods has maintained a solid three-year growth rate of dividends of 19.5 percent. Hormel Foods currently ranks 1st in yield within the large cap consumer goods, meat products category. The quarterly dividend for the January payment will be $0.17 versus the prior year rate of $0.145 per share. Hormel Food Corp. is not a member of our Top 100 Dividend Stock List (see below).

The dividend will be paid at the new higher rate on February 15, 2017, to shareholders of record at close of business on January 17, 2017. Hormel Foods is currently priced at $35.47. Listed in the table below are the quarterly dividend payments since 2010.

Date	Quarterly Dividend
1/17/2017	0.17
10/20/2016	0.145
7/14/2016	0.145
4/14/2016	0.145
1/14/2016	0.145
10/15/2015	0.125
7/16/2015	0.125
4/16/2015	0.125
1/15/2015	0.125
10/16/2014	0.1
7/17/2014	0.1
4/16/2014	0.1
1/17/2014	0.1
10/17/2013	0.085
7/18/2013	0.085
4/18/2013	0.085
1/17/2013	0.085
10/18/2012	0.075
7/19/2012	0.075
4/19/2012	0.075
1/19/2012	0.075
10/19/2011	0.064
7/20/2011	0.064
4/19/2011	0.064
1/19/2011	0.064
10/20/2010	0.052
7/21/2010	0.052
4/14/2010	0.052
1/20/2010	0.052

Quantitative Analysis:

We examine Hormel Foods upon our five key criteria, which include; 

Category	Value	Score
Dividend Yield	1.92%	300
Dividend Growth (3 to 6 year avg)	19%	96
Forward P/E	19.59	212
S&P Financial Rating	A	120
Beta	0.75	75
Total Score		803

Additional quantitative information on P/S ratio and historical yield;

% Yield	3 Year Div. Growth Rate	6 Year Div. Growth Rate	SPS 2016	P/S Ratio	10 yr P/S Low	10 yr P/S High	5 yr lowest Yield %	5 yr max Yield %
1.92%	19.5%	18.5%	18	1.96	0.69	2.53	1.17%	2.08%

Positives;

• Hormel Foods has paid out a dividend consecutively for the last 23 years.
• Hormel Foods maintains a beta of 0.75, lower than the average company.
• Hormel Foods’ current dividend yield (1.92%) is above its five-year average and near the max yield of 2.08%.

Negatives;

• Hormel Foods’ dividend yield is below that of the S&P 500 Index.
• Hormel Foods is trading towards the top end of its ten-year average price/sales (P/S) average and at an elevated 19.59 next year’s earnings.

Latest Earnings & Overall Analysis:

Hormel Foods issued its earnings data on November 22nd. The food provider reported mixed results for Q4 2016.  Quarterly earnings per share were 45 cents, reflecting a 21.6% increase from last year’s 37 cents. That missed expectations by a penny. For the entire 2016 fiscal year, earnings per share came in at $1.64 versus the year-ago period result of $1.27 per share, an increase of nearly 30%.

As for top-line results, Hormel generated revenue of $2,627.9 million, up nearly 10% year over year. This was slightly above estimates. For full year 2016, revenue was $9,523.2 million versus $9,263.9 million.  Gross margins also expanded 220 basis points to 22.8%.

In examining the details of the report, three of Hormel’s five segments reported volume sales and earnings growth. Refrigerated foods and Jennie-O Turkey Store sales posted double-digit growth. Four of the five major segments generated positive sales growth. Refrigerated Foods sales increased 7.6% to $1,237M.  Hormel’s management team on the conference call indicated that the pepperoni business was the major growth driver.  Grocery Products sales increased 16.4%. Justin’s (see below) contributed nearly  $25 million to sales in Q4. Turkey (Jennie-O Turkey Store) sales increased 28.8%.  Operating profits within the division also advanced by 26% to $92.3M.  Specialty Foods sales declined nearly 20% as the divestiture of Diamond Crystal had an impact. International sales increased a meak 1.6%.  The poor growth numbers were primarily due to inflationary pork input costs.

Hormel Foods announced in May it had entered into a definitive agreement to acquire Justin’s, owner of the Justin’s® brand and a pioneer in nut butter-based snacking, to drive future growth. Justin’s markets four very promising  nut butter-based snack lines. This line is the fastest growing portion of the nut butter category nationwide. It also allows Hormel to diversify away from products like Spam to more healthy alternatives.  Hormel already owns the popular Skippy brand, so the addition of Justin’s enhances Hormel’s positioning in the nut butter category. In 2015, Hormel acquired Applegate Farms for $775 million. Applegate produces natural and organic prepared meats. At the time of the purchase, the firm was the number one brand in natural and organic meats.

The firm then just announced its selling the Saag’s Specialty Meats, Farmer’s John, and PFFJ operations to Smithfield Foods. This is part of management’s goal to move away from traditional low margin food products and into more innovative solutions like the nut butter-based products.   This continues Hormel’s continued advance into new product higher margin categories.

Hormel Foods is well capitalized, maintaining cash of $415.1 million, up from $347.2 million as of Oct 25, 2015.  The firm also repurchased 1.2 million shares of common stock, spending $43 million in the fourth quarter. Hormel has 13 million shares remaining to be purchased from the current authorization. The dividend payout ratio is 41%, below most competitors in the industry.

A big story for Hormel is future margin expansion.  Margins are now at the 14% level.  However, management made it clear in the Q4 conference call that the target is now 15%-19% by 2020. That would take the firm into the top quartile in its industry.  Hormel plans to reach these goals through additional acquisitions of higher margin products and moving into more value-added concepts.  This is a bold target for Hormel. Basically they would move up the industry ladder from the lower half to the top quartile.  The decision to exit the highly commoditized Farmer John & Saag’s Specialty Meats businesses showed a strong commitment to advancing margins.

Priced at $33.50 a share, the stock is down nearly $6 since the start of the year. Its high price for the year was $45.62 reached on February 16, 2016.  Thus Hormel has not performed as well as many other companies within the consumer staples sector. The shares of Hormel dropped nearly 11% in May after reporting Q2 earnings and providing very negative guidance.  Refrigerated food profit margins dropped from 14.4% to 11.9%. But the firm has improved results and margins in both Q3 and Q4.  Hormel Foods anticipates revenue growth of 5% in fiscal 2017 and offered solid earning per share growth in the mid-single digits; $1.68-$1.74 per share.

Its valuation P/E based upon a median estimate of $1.71 a share for 2017 earnings is 19.59 . This is a rich valuation for a company generating 5% sales growth and 6-8% earnings growth. The stock also trades at nearly 2 times sales. The firm does offer a new growth path and the potential for impressive margin expansion.  It also provides a stable earnings stream and very impressive annual dividend increases. The stock also has a low beta of 0.75. We like the firm’s prospects and dividend potential. But based on the firm’s dividend yield, that is below the S&P 500, a rich P/S ratio, and a high forward P/E, Hormel Foods does not qualify as a member of our  Top 100 Dividend Stocks.