Hormel Foods Corporation: Valuation Matters
One of my goals for the year was to increase the amount of capital I have invested in consumer staples companies. I like the consumer staples because of the fact that their businesses are rather boring and don't fluctuate much based on the state of the economy. You aren't going to stop eating or doing laundry or brushing your teeth just because the economy is limping along which makes for steady and consistent growth for the companies that provide those products you use every day.
Unfortunately I haven't been successful at increasing my exposure to consumer staples thus far. The market recognizes the strength of the staples and typically rewards them with a premium valuation.
One company that intrigued me on initial perusing of David Fish's CCC list was Hormel Foods Corporation (NYSE:HRL). What caught my eye was the dividend growth over the last decade which is quite impressive with double digit annualized growth over the last 1, 3, 5, and 10 year periods. Even more impressive is that they've increased the dividend for the last 49 years and should raise it again when the next payment is announced later this month.
Potential earnings and dividend growth
Let's get some general information out of the way before we get started. My reference entry price will be the close from November 11th, $67.36, with an assumed purchase date of November 12th. For fiscal year 2015 Hormel paid out $1.00 per share in dividends and is expected to generate $2.61 in earnings per share for the year. This gives an expected payout ratio of 38.3% for the year. The sale date will be December 31, 2018 with a price calculated at 20x 2018 earnings per share.
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