When a company pays a dividend, it's a good thing for shareholders. When a company consistently pays a dividend every quarter, it's even better. And when a company can increase its dividend year after year because its profits are going up, it's a great thing.
If a dividend raise is a great thing, then Hormel Foods(NYSE: HRL) is one of the greatest dividend stocks there is. On Feb. 15, the company paid a dividend for the 382nd consecutive quarter. Moreover, this dividend was a 3% increase from its previous dividend, marking the 58th consecutive year that Hormel has raised its payment.
Having increased its dividend for more than 50 consecutive years, Hormel is one of the relatively few Dividend Kings.
Despite its history of greatness for dividend investors, Hormel stock is down in the dumps, having dropped about 45% from its high. The chart below goes back about 50 years. And it clearly shows that this is the worst pullback for Hormel stock in five decades.
Therefore, this is an unprecedented pullback for Hormel stock. But not only is the drop in price unprecedented, it's dropped it to an unusually inexpensive valuation as well.
When investors compare a company's market valuation to its profits, this is called a price-to-earnings (P/E) valuation. Hormel has a P/E ratio of almost 21. That's substantially cheaper than its 10-year average and within spitting distance of a once-in-a-decade bargain valuation.
HRL PE Ratio data by YCharts
Here's what else investors need to know
I've established that the drop for Hormel stock is unprecedented and that its valuation is unusually cheap. Therefore, this is an opportune time to invest. But allow me to explain why I believe Hormel stock is poised to grow its earnings in coming years, strengthening my belief that it's a solid addition to a stock portfolio today.
When consumers think of Hormel, many equate it with its Spam products. But the company also sells many other consumer food products across various categories. Furthermore, many investors might think that Hormel only sells packaged foods in grocery stores. But it also supplies products to foodservice companies, and that's a big profit opportunity for Hormel.
Hormel's fiscal 2023 ended on Oct. 29, 2023. In its fiscal 2023, over half of the company's profits came from its foodservice division. This division sells deli meats and pizza toppings to foodservice businesses, which are often convenience stores. This part of the business also sells snacks at convenience stores. And that's significant as it relates to its future growth.
It's reasonable to expect tepid growth in grocery stores from Hormel's more mature brands such as Spam. However, the company acquired the Planters brand in 2021. And Planters has a larger presence in convenience stores than Hormel did on its own.
Hormel now has the opportunity to expand its foodservice product offerings in convenience stores over time because it already has a foot in the door with Planters. This is something that its management highlighted in its investor day presentation in 2023.
To be fair, growth in convenience store channels didn't materialize for Hormel in 2023 as one would have hoped -- foodservice sales volume (of which convenience stores are a component) merely held steady. However, Hormel has an illustrious long-term track record of success. Therefore, I wouldn't bet against it eventually finding the growth that it expects in convenience stores.
In summary, Hormel anticipates growth in convenience store channels in coming years, which is a higher-margin revenue source for the company. This should lead to respectable long-term earnings growth, which can drive the stock price higher over time. As an added bonus, the stock is trading at a compelling valuation, making now one of the best times to buy Hormel stock in quite some time.
Should you invest $1,000 in Hormel Foods right now?
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Jon Quast has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
