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.
While this stock does have a lower dividend percent than I usually prefer, I do like the 5 year growth rate of the dividend and the payout ratio. I will absolutely buy once it hits 2.5%, but might get in at a lower rate. I will do more research on this stock. Thanks for bringing it to my attention.ReplyDelete
Thanks for your comment. The low yield is probably a sticking point for many potential investors, but I am okay with it (my minimum desired yield is 2%). If the company continues to perform as well as it has in the past, then I think I will be very satisfied with my investment.
I really must look more closely at Hormel as well. It's yield is a bit low for what I'm looking to accomplish, but that doesn't mean I can't find entry points that are attractive without doing too much harm to my overall portfolio's yield on cost.ReplyDelete
But most notably, I can't shake that I only know them for their SPAM brand. I will have to check out their stable of brands and see if they're on my shopping list.
Hi Dividend Maven,Delete
Thanks for your comment. Hormel occupies some niche areas in the processed meat department, which may be why some of its brands are not as well known as others. I like the turkey burgers from their Jennie-O Turkey Store brand and I've tried a few other products since becoming a shareholder.
You guys haven't had Hormel chili? My mom bought that all the time when I was a kid. When I think Hormel, I think chili. Even more than spam.ReplyDelete
Looks like a winner. Like you say the yield is a bit low for my strategy, but I can see why you own it.
Hi Compounding Income,Delete
I've also had Hormel chili, which is good.
I agree that it looks like a winner. Hormel is one of those stable businesses that should fare well in most economic environments.
I love the strategy. Conservative and steady. It's the same I employ and I believe it will serve us well over the long haul.
HRL looks like a solid business, with just the low yield being a slight drawback...as touched on in above comments. As long as the dividend growth is able to keep up, the low entry yield won't matter that much when you're sitting on a hefty payout 10 years from now.
I'm not seeing a lot of value on the horizon right now. I bought EMR not too long ago when it was below $45, but I haven't made any purchases since. I missed my opportunity to add to PG and now it's trading around $65.
Keep up the great work.
Hi Dividend Mantra,Delete
Thanks, I appreciate the feedback. I agree that the low initial yield will not matter much in the long run if the company can maintain a nice dividend growth rate.
I am also not seeing many attractively valued stocks at the moment. The strong run-up in the market on Thursday and Friday of last week erased some potential buying opportunities. In general, I have been disappointed that earnings season has not brought much in the way of dips for the stocks I am interested in buying. Thus, I may just sit back and play the waiting game for a while.
Hi Deedubs Enjoy and agree with the analysis and logic. Was looking through the drip spreadsheet by David Fish, noticed for ATT (T) the payout ratio is 234%, how can a company continue to payout dividends that high, is this one of indication that the payouts are not sustainable. Looking forward for your Monthly review as well for July 2012.ReplyDelete
Thanks for your comment. The current payout ratio for T is misleading because earnings were temporarily depressed by the large, one-time breakup fee associated with the failed T-Mobile deal. "Normalized" earnings for fiscal year 2012 are expected to be $2.40 (much higher than the $0.75 that shows up on various finance websites), which would give T a payout ratio of around 73% (and a P/E closer to 16). That number is still somewhat high (I prefer payout ratios below 60%), but not excessive for a telecom company.