Company Description: Hormel Foods Corp. is a multinational manufacturer and marketer of consumer-branded food and meat products.
Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value (see page 2 of the linked PDF for a detailed description):
1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number
HRL is trading at a premium to all four valuations above. The stock is trading at a slight premium to its calculated fair value of $34.19. HRL did not earn any Stars in this section.
Dividend Analytical Data: In this section there are three possible Stars and three key metrics (see page 2 of the linked PDF for a detailed description):
1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%
HRL earned three Stars in this section for 1.), 2.) and 3.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. HRL earned a Star for having an acceptable score in at least two of the four Key Metrics measured. The company has paid a cash dividend to shareholders every year since 1928 and has increased its dividend payments for 47 consecutive years.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA) or Treasury bond? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section (see page 2 of the linked PDF for a detailed description):
1. NPV MMA Diff.
2. Years to > MMA
HRL earned a Star in this section for its NPV MMA Diff. of the $1,532. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as HRL has. If HRL grows its dividend at 12.4% per year, it will take 3 years to equal a MMA yielding an estimated 20-year average rate of 2.54%. HRL earned a check for the Key Metric 'Years to > MMA' since its three years is less than the five-year target.
Memberships and Peers: HRL is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index and a Dividend Champion. The company's peer group includes: Cal-Maine Foods Inc. (CALM) with a 1.9% yield, Mondelez International Inc. (MDLZ) with a 1.9% yield and ConAgra Foods Inc. (CAG) with a 3.1% yield.
Conclusion: HRL did not earn any Stars in the Fair Value section, earned three Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of four Stars. This quantitatively ranks HRL as a 4-Star Strong stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $55.62 before HRL's NPV MMA Differential decreased to the $500 minimum that I look for in a stock with 47 years of consecutive dividend increases. At that price the stock would yield 1.22%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $500 NPV MMA Differential, the calculated rate is 8.2%. This dividend growth rate is well below the 12.4% used in this analysis, thus providing a margin of safety. HRL has a risk rating of 1.00 which classifies it as a low risk stock.
HRL's brands include Hormel, Spam, Jennie-O, Country Crock, Lloyd's, and Chi-Chi's. In addition, HRL recently expanded into a non-meat category with the acquisition of the Skippy brand from Unilever. The company has defined a niche on which it converts commodity meats to value-added packaged products. This has allowed the company to achieve superior results when compared with other meat processors. In the future, Asian markets and other non-U.S. sales should benefit from rising incomes and changing lifestyles in developing markets.
HRL has a relatively strong balance sheet, with minimal debt and generates strong cash flows (even during the recession). Like most in the industry, the company has a high sensitivity to changes in commodity costs. The stock is attractively priced at 3.4% below my calculated fair value price of $34.19. However, its dividend yield is below my desired minimum, so I will continue to wait for a more opportune entry point.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I was long in HRL (0.0% of my Dividend Growth Portfolio). See a list of all my dividend growth holdings here.
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