HRL’s balance sheet is also in excellent shape. As seen below, the company could cover its entire net debt with cash on hand and less than half a year’s worth of earnings before interest and taxes (EBIT). A healthy balance sheet enables HRL to continue searching for the right acquisitions to further growth the business.
Source: Simply Safe Dividends
HRL’s dividend is one of the safest in the market. The company has relatively low payout ratios, sells recession-resistant products, generates excellent free cash flow, and has a very healthy balance sheet.
Dividend Growth Score
Our Growth Score answers the question, “How fast is the dividend likely to grow?” It considers many of the same fundamental factors as the Safety Score but places more weight on growth-centric metrics like sales and earnings growth and payout ratios. Scores of 50 are average, 75 or higher is very good, and 25 or lower is considered weak.
HRL’s dividend Growth Score of 85 indicates that the company has excellent dividend growth potential. HRL has paid dividends every year since 1928 and recently achieved its 50th consecutive increase, qualifying it for the exclusive list of dividend kings (companies with at least 50 straight years of dividend growth). Of course, HRL is also one of the dividend aristocrats.
As seen below, HRL’s dividend growth has accelerated over its last 10 fiscal years. The company’s dividend increase for 2016 is 16%, and we believe HRL can continue delivering double-digit dividend hikes for at least the next several years given its relatively low payout ratios and decent earnings growth.
Source: Simply Safe Dividends
Valuation
HRL trades at 26x forward earnings and has a dividend yield of 1.5%, which is below its five year average dividend yield of 1.7%.
HRL is no doubt a great business, but it’s really hard to justify the stock’s current valuation. At the end of the day, this is a business that seems unlikely to grow sales much faster than GDP and has significantly benefited from plunging raw material costs over the last year. Is that really worth paying 26 times earnings for?
With company margins at a 10-year high and bumping up against the top of HRL’s long-term margin guidance, fundamentals could be about as good as they will get. We plan on watching HRL from the sidelines and would become more interested if raw material cost trends reverse and the earnings multiple comes way down.
Conclusion
Hormel Foods Corp (NYSE:HRL) is a great company that will likely be around for a very long time to come, but its current valuation is hard to get comfortable with, especially in light of the raw material cost benefits it has enjoyed over the last year. For now, we remain more interested in some of our other favorite blue chip dividend stocks.
Disclosure: None
