2023-12-06 07:10:00 ET
Summary
- The stock market had a strong month, with the S&P experiencing its 18th-best monthly gain since 1950.
- It's always a market of stocks, not a stock market. World-class companies are always on sale if you know where to look.
- Hormel Foods Corporation, a legendary dividend king, is facing its worst bear market since the Great Depression. This is the highest yield in 40 years.
- Management has a solid plan to return to 6% growth, and if you believe they will succeed, Hormel is a potentially fantastic buy right now.
- If you're not a fan of Hormel, here are five alternative dividend kings with an average yield of 6%, trading at a 20% discount, that are expected to quadruple over the coming decade.
What a month for the stock market.
The S&P 500 (SP500) just had its 18th-best monthly gain since 1950.
The only problem is that stocks are now trading at 19X forward earnings, a 13% historical premium.
But of course, it's always and forever a market of stocks, not a stock market.
World-class blue-chips, including dividend aristocrats, kings, and Ultra SWANs, are still on sale if you know where to look.
Hormel Foods Corporation ( HRL ), the legendary dividend king raising its dividend every year for almost 60 years, is now in its worst bear market since the Great Depression.
Yes, it's fallen as much as 43%, a larger decline than during the Great Financial Crisis, when the global economy almost collapsed.
Let's look at why the market hates Hormel so much today, why it's likely a great buy, and how to find 6% yielding dividend king alternatives easily and quickly.
- dividend king: any company with a 50+ year dividend growth streak.
Why Hormel Is Suffering
As an analyst, I'm not worried that Hormel's most famous product is a class 1 carcinogen packed with fat, cholesterol, and sodium.
Spam Classic
Hormel
Don't get me wrong, no one who cares about good health should eat SPAM, where a single can has three days' worth of the saturated fat recommended by the American Heart Association.
Are products like these why analysts keep cutting their growth targets on Hormel?
Hormel's record earnings were in 2018 (tax hike boost), and by 2025, they are expected to remain below that high water mark.
Hormel provided an underwhelming margin outlook during its investor day last month that was further confirmed in its fiscal 2023 earnings release." - Morningstar .
Sales have grown, but profits have not due to margin pressure, and now, no sales growth for the next few years is expected.
Hormel's issues are currently due to margin pressure created by the Pandemic.
Recall that supply chains were disrupted during the pandemic, and companies scrambled to obtain supply at any price.
Initially, consumers were flush with cash able to pay any price to get food they wanted.
Hormel has premium brands, but even many of those have struggled under the highest inflation in 42 years.
Remember that while the Fed and Wall Street are focused on YOY inflation, consumers are focused on the cumulative price increase.
If prices doubled and stay flat for a year, the Fed would declare victory while consumers would be outraged.
The overall cumulative inflation has been 25% since the pandemic began, higher than wages have risen, and that's why consumers are trading down for lower-cost brands.
Not all companies are suffering equally. Pepsi has been hiking prices 14% and volumes have only fallen 2%, for example.
However, Hormel also suffers from company-specific issues, like tough comps for its turkey business. In last year's Avian flu pandemic (which killed chickens but not humans), chicken prices went through the roof, and consumers turned to Turkey.
Chicken prices have normalized, and Hormel is struggling even more with a supply chain that whips between insufficient supply and too much.
While the company expects its supply-chain modernization and portfolio optimization efforts to generate $250 million in savings, it estimates it will take a few years, leading to a more gradual recovery than we previously forecast." - Morningstar.
Hormel is suffering on the top line because globally its brands have fallen out of favor and are losing market share to other companies.
In the meantime, it's having to deal with its supply chains and margin pressure at a time when consumers are being tested on brand loyalty by the worst inflation in 42 years.
For context about how bad HRL's investor day was, at least from a short-term perspective, before that presentation, 2024 consensus EPS estimates were $2.4, and now they are $1.61.
- a 33% decline.
In 2021, HRL acquired Planters for $3.4 billion from Kraft, its largest deal in history.
Planters sales have not grown as it expected, and it's been forced to spend more on advertising to try to make this acquisition pay off.
Combined with its supply chain and inflation-related troubles, leverage has risen though to just 2.4X at the moment, far below the 4X levels safe for food companies.
However, it has resulted in a credit rating downgrade, though HRL is still an A-rated company.
Why I Still Have Confidence This Is A Good Company
Hormel's management team is one of the most experienced in the world.
Its CEO has been with the company for 34 years, and its head of supply chain for 38 years.
Its executive team has a collective 192 years of experience and has delivered investor returns like this.
Total Returns Since 1990
Remember that HRL is in its worst bear market since the Depression, and it's still beating the market over the last 33 years.
HRL is a consistent market beater because it's able to adapt and overcome.
That's what it's been doing since it was founded in 1891.
- 132 years of adapting to change and succeeding.
Management plans to generate 5% to 7% growth by 2026.
According to management, that's 8.7% to 10.7% total return potential, plus whatever buybacks management wants to do once de-leveraging is complete.
Is 9% to 13% long-term return potential great for a low-risk company with good long-term risk management?
We use S&P Global's global long-term risk-management ratings for our risk rating.
- S&P has spent over 20 years perfecting its risk model
- which is based on over 30 major risk categories, over 130 subcategories, and 1,000 individual metrics
- 50% of metrics are industry-specific
- This risk rating has been included in every credit rating for decades.
The risk rating is based on the global percentile of a company's risk management compared to 8,000 S&P-rated companies covering 90% of the world's market cap.
HRL scores 70th Percentile On Global Long-Term Risk Management
S&P's risk management scores factor in things like:
- supply chain management
- crisis management
- cyber-security
- privacy protection
- efficiency
- R&D efficiency
- innovation management
- labor relations
- talent retention
- worker training/skills improvement
- occupational health & safety
- customer relationship management
- business ethics
- climate strategy adaptation
- sustainable agricultural practices
- corporate governance
- brand management
- interest rate risk management.
Classification | S&P LT Risk-Management Global Percentile | Risk-Management Interpretation | Risk-Management Rating |
BTI, ILMN, SIEGY, SPGI, WM, CI, CSCO, WMB, SAP, CL | 100 | Exceptional (Top 80 companies in the world) | Very Low Risk |
Enbridge | 96 | Exceptional | Very Low Risk |
Strong ESG Stocks | 86 | Very Good | Very Low Risk |
Foreign Dividend Stocks | 77 | Good, Bordering On Very Good | Low Risk |
Ultra SWANs | 74 | Good | Low Risk |
Hormel | 70 | Good | Low Risk |
Dividend Aristocrats | 67 | Above-Average (Bordering On Good) | Low Risk |
Low Volatility Stocks | 65 | Above-Average | Low Risk |
Master List average | 61 | Above-Average | Low Risk |
Dividend Kings | 60 | Above-Average | Low Risk |
Hyper-Growth stocks | 59 | Average, Bordering On Above-Average | Medium Risk |
Dividend Champions | 55 | Average | Medium Risk |
Monthly Dividend Stocks | 41 | Average | Medium Risk |
(Source: DK Research Terminal.)
Am I saying HRL is going to go back to generating 13% long-term returns? No, probably not. But is a nearly 4% yielding recession-resistant A-rated dividend king Ultra SWAN whose management is battle-tested and guiding for at least 9% returns worth of consideration?
For some people, yes.
Hormel is trading at the highest yield in almost 40 years. If you ever wanted to buy this company and believe management can adapt and overcome its current challenges as they have done for the last 34 years, then now is a great time to buy HRL.
And what if you, like me, have no interest in buying Hormel (I own it via ETF) products or stock?
How to Find The Best 6% Yielding Hormel Alternatives Video (Click This Link To Watch)
Here is how I have used our DK Zen Research Terminal to find the best 6% yielding dividend king alternatives to Hormel.
From 505 stocks in our Master List to the best high-yield Ultra-SWAN quality dividend kings with superior long-term return potential.
All in one minute, thanks to the DK Zen Research Terminal. This is how I find all my investment ideas.
Screening Criteria | Companies Remaining | % Of Master List | |
1 | Dividend Kings List (any stock with a 50+ year dividend growth streak) | 46 | 9.20% |
2 | BHS Rating "reasonable buy, good buy, strong buy, very strong buy, ultra value buy" | 36 | 7.20% |
3 | Non-Speculative (No Turnaround Stocks, investment grade) | 31 | 6.20% |
4 | 13 Ultra SWAN Quality | 21 | 4.20% |
5 | Yield of 3.7+% | 5 | 1.00% |
Total Time | 1 minute |
Short, simple, and super effective. It's always and forever a market of stocks, not a stock market.
6% Yielding Dividend King (50+ Year Streak) Alternatives To Hormel
Bottom line up front, here are the fundamentals for these incredible high-yield Ultra SWAN dividend king Hormel Alternatives.
Fundamentals Summary
- yield: 5.6% (4X S&P 500 and 2% more than SCHD or VYM)
- dividend safety: 98 safe (1.1% dividend cut risk)
- overall quality: 97% low-risk Ultra SWAN dividend kings
- credit rating: BBB+ stable outlook (4.13% 30-year bankruptcy risk)
- S&P LT Risk management global percentile: 70th = low risk (good risk management)
- long-term growth consensus: 6.8% vs 3.0% HRL
- long-term total return potential: 12.3% vs 6.7% Walgreens
- discount to fair value: 19% discount (potential very strong buy) vs 13% overvaluation on S&P and 28% discount for HRL
- 10-year valuation boost: 2.1% annually
- 10-year consensus total return potential: 5.6% yield + 6.8% growth + 2.1% valuation boost = 15.4% vs 9% S&P and 10% HRL
- 10-year consensus total return potential: = 319 % vs 134% S&P 500 and 160% HRL.
Hormel is likely to beat the market over the next decade, but not by much. In contrast, these 6% yielding dividend king alternatives are expected to more than quadruple.
Dividend Kings Zen Research Terminal
I've linked articles about each for further research and sorted by yield.
- Altria ( MO )
- Philip Morris International ( PM )
- Federal Realty Investment Trust ( FRT )
- AbbVie ( ABBV )
- Kimberly-Clark ( KMB ).
Consensus Total Return Potential Through 2025
- if and only if each company grows as analysts expect
- and returns to historical market-determined fair value
- this is what you will make.
Altria Group
Philip Morris International
Federal Realty Investment Trust
AbbVie
Kimberly Clark
S&P 500
Bottom Line: Hormel Is A Potentially Fantastic Buy, And So Are These 6%-Yielding Dividend Aristocrats
Hormel's management is confident that it can eventually return to the historical 7% to 8% growth rates of the past, powered by rising protein demand in developing markets.
If that's true, then Hormel's 10-year return potential jumps to 3.7% yield + 7% to 8% growth + 3.3% annual valuation boost = 14.5% annual return potential = 287% vs 134% S&P 500.
However, even if Hormel pulls off this kind of growth, MO, PM, FRT, ABBV, and KMB offer superior 15.4% annual return potential, and with a lot less fundamental risk.
HRL Alternative Fundamentals Summary
- yield: 5.6% (4X S&P 500 and 2% more than SCHD or VYM)
- dividend safety: 98 safe (1.1% dividend cut risk)
- overall quality: 97% low-risk Ultra SWAN dividend kings
- credit rating: BBB+ stable outlook (4.13% 30-year bankruptcy risk)
- S&P LT Risk management global percentile: 70th = low risk (good risk management)
- long-term growth consensus: 6.8% vs 3.0% HRL
- long-term total return potential: 12.3% vs 6.7% Walgreens
- discount to fair value: 19% discount (potential very strong buy) vs 13% overvaluation on S&P and 28% discount for HRL
- 10-year valuation boost: 2.1% annually
- 10-year consensus total return potential: 5.6% yield + 6.8% growth + 2.1% valuation boost = 15.4% vs 9% S&P and 10% HRL
- 10-year consensus total return potential: = 319 % vs 134% S&P 500 and 160% HRL.
As things stand now, Hormel looks like a potentially fantastic medium-term buy, but there are many superior options to consider.
For further details see:
Hormel Is A Historic Buy, And So Are These 6%-Yielding Dividend Aristocrats