Today I bought shares of Hormel Foods (HRL), a well-known manufacturer of food and meat products. I wrote about several appealing features of the company in the post for my initial purchase back in April.
I was motivated to add to my position in HRL because the stock's price has dropped recently, falling 9% in less than one month. The stock is now trading at its lowest point since early October 2011. I consider HRL to be fairly valued with a P/E of 16.0 (its historic P/E is around 16.8), PEG of 1.7, and P/S of 0.9. Even though I generally aim to buy undervalued stocks, I will also buy fairly valued stocks of high-quality companies, of which HRL is a prime example.
Additional motivations for this purchase were related to the ongoing problems in Europe, the drought in the U.S., and slow economic growth in the U.S. I watched a recent interview in which Jeffrey Ettinger, the CEO of Hormel Foods, was asked how Europe would affect the company's business. He remarked that it would have very little impact because the company has a minimal presence in Europe; the vast majority of its business is conducted in North America. In another interview, he was asked how the U.S. drought would affect the company's margins because feed prices are increasing. He indicated that the company was doing okay for the time being because of its hedging practices. Finally, regarding the U.S. economy, I think the company would continue to fare well in a recessionary environment because consumers may be more likely to eat at home than go out. Moreover, the company has very little debt, so it is in good financial shape for weathering any downturn. For all these reasons, I like Hormel Foods as a long-term investment, especially in light of current domestic and global conditions.
I bought 50 shares of HRL at the price of $27.84 per share, giving me a total of 100 shares at an average price of exactly $28.00 per share and a 2.13% yield on cost. As I mentioned before, the yield is lower than I prefer, but it is the only negative aspect of the stock and outweighed by its many positive aspects. At the current dividend rate, I can expect to receive quarterly dividends from HRL of $15.00, which is double the $7.50 I was getting before this purchase. The stock went ex-dividend last week, so the higher dividend will not take effect until the fall, but my lower cost basis more than makes up for the single-quarter dividend difference. HRL will now contribute a total of $60.00 to my annual dividend income, which is $30.00 more than before. Even though I now have a decent-sized position in HRL, I would consider making an additional purchase if the stock's price were to fall further in the coming months.