Hormel Foods

While this may not be the best time to buy shares of Hormel Foods, there's no doubt this is a great company that should be a part of any dividend growth investor's portfolio. In fact I'm hard pressed to find anything that this company makes that I don't enjoy. Hormel Foods has been around for over 123 years feeding all of us with great tasting food at home, at work and in restaurants everywhere. As this company now expands into the world's markets that are demanding great tasting, healthy and safe to eat foods, I expect the future of this company is only going to get better. 

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1. Sales and profits in 4 out of the 5 company segments are increasing significantly and are expected to continue to increase going forward.
   
2. Costs are increasing as the price of raw meat increases and supplies diminish. 
   
3. Management has been able to increase prices as costs increase, so far.
   
4. Chinese and Asian sales and profits are increasing at a very rapid rate as the company expand internationally.

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The Company

Hormel Foods Corporation (HRL) processes, markets, and sells consumer-branded meat and food products. The company operates in five segments: Grocery Products, Refrigerated Foods, Jennie-O Turkey Store, Specialty Foods, and International & Other. The Grocery Products segment offers shelf-stable food products, including canned luncheon meats, shelf-stable microwaveable meals, stews, chilies, hash, meat spreads, flour and corn tortillas, salsas, and tortilla chips in the retail market. The Refrigerated Foods segment provides branded and unbranded pork and beef products for retail, foodservice, and fresh product customers. The Jennie-O Turkey Store segment offers branded and unbranded turkey products for retail, foodservice, and fresh product customers. The Specialty Foods segment is involved in the packaging and sale of various sugar and sugar substitute products, salt and pepper products, liquid portion products, dessert mixes, ready-to-drink products, sports nutrition products, gelatin products, and private label canned meats to retail and foodservice customers. This segment also processes, markets, and sells nutritional food products and supplements to hospitals, nursing homes, and other marketers of nutritional products. The International and Other segment manufactures, markets, and sells its products internationally. Hormel Foods Corporation sells its products through sales personnel, as well as through independent brokers and distributors primarily in the United States, Australia, Canada, China, England, Japan, Mexico, Micronesia, the Philippines, and South Korea. The company was formerly known as George A. Hormel & Company and changed its name to Hormel Foods Corporation in January 1995. Hormel Foods Corporation was founded in 1891 and is based in Austin, Minnesota. (Daily Chart) (Weekly Chart)

16 February 2015
Price  $55.73
1yr Target  $55.50
Analysts  6
1yr Cap Gain  -0.42%
Dividend  $1.00
Yield  1.79%
1yr Tot Return  1.37%

3yr DGR  17.23%
5yr DGR  12.94%
Payout Ratio  %
Beta  0.57
EPS (ttm)  $2.23
EPS next yr  $2.75
P/E  24.99
PEG  3.52
ROA  11.60%
ROE  17.10%
ROI  16.00%

Hormel Foods recently announced annual earnings of $2.23 with four out of five segments registering gains for the year. As for the top line, Hormel generated record sales of $9.31 Bil. 

• The Grocery Products segment profit increased due to increases in sales of the SKIPPY Brand peanut butter, Hormel bacon toppings and the HERDEZ line of products.
• Sales for Refrigerated Foods increased led by retail sales of Hormel Black Label bacon, Hormel REV Snack Wraps and Hormel Country Crock side dishes. 
• Sales growth in the Foodservice businesses, including such items as the Hormel FIRE BRAISED Meats, Old Smokehouse Pecanwood Smoked Bacon, and Natural Choice deli meats also improved.
• The International & Other segment also turned in strong profits. This increase is the result of the first full quarter that included SKIPPY peanut butter operations in China. Strong export sales of SKIPPY peanut butter and fresh pork along with the growth in the China operations drove these positive results.
  

Going forward, increased costs due to elevated beef, pork, turkey, and avocado will continue to squeeze margins on many of Hormel's value-added product lines. In addition, any continued pork supply shortages will impact food sales. Finally, I expect the ongoing and significant growth of sales and profits in the international segment of the business to continue for many years to come as Hormel expands further into mainland China and all across Asia. 

The Fundamentals

The fundamentals are incredibly consistent for a company of this size. Looking at the data below it shows that revenues have increased in each of the last 10 years except for a slight downturn in 2009 that was quickly surpassed in 2010. The earnings show a similar slip but it occurred in 2008 and it also was quickly surpassed in 2009. These are two very small blemishes on an otherwise outstanding set of fundamentals. Dividends, of course, never missed a beat and Hormel Foods continues to maintain its place on the list of Dividend Aristocrats. 

Hormel Foods has also maintained a steady payout ratio ranging from a low of 26.82% to a high of 35.87%. Payout ratios at this level allow for companies like Hormel Foods to continue to increase their dividends for many years into the future with very little difficulty at a rate comparable to the rate of their earnings increases. Based on the current dividend payment of $1.00 per year and the estimated 2015 earnings projection of $2.53, it appears that the company is going to allow the payout ratio to rise once again to 39.52%. Continuing this trend I expect dividends to increase to $1.10 in 2016.

Year (Oct)
2016 Est
2015 Est
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003

Revenues
$10.37 Bil
$9.97 Bil
$9.31 Bil
$8.75 Bil
$8.23 Bil
$7.89 Bil
$7.22 Bil
$6.53 Bil
$6.75 Bil
$6.19 Bil
$5.74 Bil
$5.41 Bil
$4.77 Bil
$4.20 Bil

Earnings
$2.75
$2.53
$2.23
$1.95
$1.86
$1.74
$1.46
$1.27
$1.04
$1.08
$1.02
$0.91
$0.82
$0.66

Dividends
$1.10
$1.00
$0.80
$0.68
$0.60
$0.51
$0.42
$0.38
$0.37
$0.30
$0.28
$0.26
$0.22
$0.21

Payout Ratio
40.00%
39.52%
35.87%
34.87%
32.25%
29.31%
28.76%
29.92%
35.57%
27.78%
27.45%
28.57%
26.82%
31.81%

Growth rates for revenues and earnings (see below) have been relatively consistent over the past 3 year, 5 year and 10 year periods. The growth rate for its dividend has increased recently from the 12% level to the 17% level as management has allowed the payout ratio to increase. Personally I don't see this rate of growth continuing for too many quarters or years into the future. Instead I see the dividend growth leveling off as the payout ratio approached 50% and management tends to slow the growth rate. At that point (or sooner), the dividend growth rate should reflect the rate of growth in earnings, which is still at a very respectable 10-13% rate. 

Revenues Growth Rates
3yr =  6.54%
5yr =  5.32%
10yr = 7.61%

Earnings Growth Rates   
3yr =  10.02%
5yr =  13.39%
10yr = 11.44%

Dividend Growth Rates   
3yr =  17.23%
5yr =  12.94%
10yr = 12.46%

The Competition

Hormel Foods Corp is part of the Meat Products Industry which is part of the Consumer Goods Sector of the economy. Below is a list of the major corporations included in this industry and are listed in the order of their market capitalization.

1. Tyson Foods Inc. (TSN)
   
2. Hormel Foods Corp
   
3. Leucadia National Corp (LUK)
   
4. Pilgrims Corp (PPC)
   
5. Bridgford Foods Corp (BRID)

Conclusion

This is probably one of the better companies that I have reviewed. I really can't find much that I don't like about this company. If there's a blemish on this stock, it's that its dividend yield is only 1.79% which is less than the minimum of 2.00% I usually like to consider.

In addition the rising cost of raw materials would normally send out alarms but the great  management team at Hormel Foods has historically been able to raise their prices. I expect great management always rises to these kinds of challenges. 

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