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Shares of Hormel Foods (NYSE: HRL) are down by a bit more than 35% from the high they reached in April 2022. There were some good reasons for that pullback, which is way worse than the roughly 5% drop the average consumer staples company has taken from its peak, using the Consumer Staples Select SPDR Fund (NYSEMKT: XLP) as an industry yardstick. But there are signs that Hormel management may be starting to right the ship, which makes this a good time to jump aboard.
Why should dividend growth investors like Hormel now?
Hormel's dividend yield at the current share price is about 3.3%. That's much more than an S&P 500 index fund would net you and higher than the 2.5% you would collect from Consumer Staples Select SPDR, but it's still not exactly a huge yield. But Hormel's yield is normally pretty modest -- today, it's actually near the highest level in the company's history, which suggests that the stock is on the sale rack.
It's also important to note that Hormel is a Dividend King, with a 57-year streak of annual payout hikes. The annualized rate of the increases over the past decade, meanwhile, was a lofty 12.5% or so -- despite more recent increases at lower rates. Clearly, Hormel has impressive dividend bona fides and, currently, an attractively high yield, historically speaking.
What's going on at Hormel?
Hormel faces some very real problems today, which is why its stock price has plummeted. Among those issues are tightening margins thanks to inflation, turkey supply issues caused by avian flu, a slow recovery in China from coronavirus-related shutdowns, and weakness in the nut market just as Hormel is working to integrate its purchase of Planters. Although that's a lot of bad news to deal with at one time, none of these issues alone is likely to cause permanent harm to the company. In other words, as the saying goes, "This too shall pass."
For example, on the margin front, the big problem is that Hormel hasn't been able to fully pass its cost increases on to consumers to the same degree as some of its competitors. But, in the first quarter of its fiscal 2024, the company's sales volumes rose across all of its main businesses. That suggests that consumers are finally starting to come back to Hormel's brands.
Turkey supply will wax and wane over time, but a key callout from the first-quarter earnings press release was: "We grew retail volume and sales of Jennie-O turkey items during the quarter, including above category performance in the fresh ground turkey category." The big picture here is that Hormel is executing well in the turkey space despite the difficult environment.