Friday, April 13, 2012

Stock Bought: HRL

Today I bought shares of Hormel Foods (HRL), a well-known manufacturer of food and meat products sold under brands that include Hormel, Jennie-O Turkey Store, Dinty Moore, Valley Fresh, Stagg, MegaMex, and, last but not least, SPAM.

Hormel is a solid company with several appealing features. It has had stable growth in revenue and earnings for many years, demonstrating that it is a well-run business. Its balance sheet is very strong, especially when compared with those of other companies in the food industry. Debt/equity is a mere 9.1 and the current ratio is 2.8, which are indicative of good financial health.

One of the most notable things about Hormel is the high level of insider ownership. The Hormel Foundation, established in 1941 as a nonprofit corporation for charitable and educational purposes, holds over 48% of the common stock to protect the company's independence. Given that the Hormel Foundation uses its tax-free dividends to support its projects, there is a strong incentive to maintain a growing dividend.

Hormel has paid uninterrupted dividends since going public in 1928 and has increased its dividend for 46 consecutive years. The 5-year dividend growth rate is 12.7% and this year's increase (announced in late 2011 for the first quarterly payment in 2012) was 17.6%. The payout ratio is a modest 36%.

I consider HRL to be fairly valued right now, sporting a P/E (ttm) of 16.9 (near its average historic P/E), PEG of 1.8, and P/S of 0.9. However, the stock has not fared well in recent months, underperforming the S&P 500 index year-to-date and hitting a 6-month low today after going down in 7 of the last 8 trading days. I decided that this was an opportune time to start a position in this high-quality company.

I bought 50 shares of HRL at the price of $28.16 per share, giving me a 2.13% yield on cost. The yield is lower than I prefer, but it is the only negative aspect of the stock and outweighed by the many positive aspects. At the current dividend rate I can expect to receive $30.00 in annual dividend income from HRL, with my first quarterly dividend of $7.50 coming in May because the stock goes ex-dividend next week. If the stock price were to fall further in the coming months, then I would strongly consider increasing my position. This purchase makes HRL the 22nd stock in my portfolio and I think it complements my position in General Mills (GIS), giving me some diversification in the processed food industry.


  1. Solid buy!

    This is a well-run company and I'm surprised to see its DGR is so high. I definitely agree with you that the low yield is the only negative here, and it's just a bit lower than I usually go. Great purchase, however.

    I think you added a quality stock to your dividend growth machine!

    Best wishes.

    1. Hi Dividend Mantra,

      Thanks! I agree that it's another quality stock in my dividend growth machine. If the company can maintain its dividend growth rate going forward, then I don't mind getting a low yield right now.