Dividend Increase | Hormel Foods (HRL) Rollover IRA

Dividend | Dividend Growth | Financial Independence | Freedom | Passive Income
Getting a pay raise while sitting on the couch?  Sign me up!  Thanks Hormel for the dividend increase!
There's an old Chinese proverb that says "the best time to plant a tree was 20 years ago, the next best time is now".  The reason for this is that it takes time for a tree to grow and prosper and for you to start reaping its benefits.  Dividend growth investing is much the same way.  It takes consistent saving and investing as well as time and patience to let the power of dividend growth take hold.

That's why one of my favorite things is when one of the companies I own decides to pay out more in dividends.  You mean I get a pay raise just for owning a small piece of a company?  Not going and doing R&D for new products or technology.  Not selling any products.  Not managing any employees or inventory.  Not making sales calls.  All I had to do was have the foresight to invest some of my savings in excellent companies.  

On November 25th the Board of Directors at Hormel Foods (HRL) approved an increase to the quarterly dividend payment.  The dividend was increased from $0.21 up to $0.2325 per share.  That's an excellent 10.7% raise!  Hormel is a Dividend Champion with 53 consecutive years of dividend increases.  Shares currently yield 2.05% based on the new annualized payout.

The newly increased dividend will be payable on February 18th to shareholders of record as of January 13th.

Since I own 102.973 shares of Hormel in my Rollover IRA, this raise increased my forward 12-month dividends by $9.27.  This is the 2nd increase I've received since initiating a position in March 2018 and the organic dividend growth comes to 24%.

A full screen version of this chart can be found here.

Of the 30 1-year periods starting in 1990, Hormel's annual dividend growth has ranged from 2.6% to 25.0%.  The average increase has been 12.0% with a median of 11.4%.

There are 26 rolling 5-year periods since 1990 and Hormel's annualized dividend growth over those periods has ranged from 3.9% to 18.9% with an average of 11.5% and a median of 11.7%.

Of the 21 rolling 10-year periods since 1990, Hormel's annualized dividend growth has ranged from 6.0% to 16.3%.  The average annualized 10-year growth rate has been 10.9% with a median of 10.5%.

The 1-, 3-, 5- and 10-year rolling dividend growth rates since 1990 can be found in the following chart.  

A full screen version of this chart can be found here.

For dividend yield theory I consider the fair value range to be the forward dividend yield +/- 10% compared to the 5 year moving average, the under/over value area to be to between 10%-20% deviation from the average and significant over/under value are greater than a 20% deviation from the average.

A full screen version of this chart can be found here.

Hormel's 5-year average forward dividend yield is 1.86% which corresponds with a share price of $50.00 based on the newly raised dividend.  

I consider the fair value range based on dividend yield theory to be the 5-year moving average yield +/- 10%.  That gives a fair value range of $45 - $55 which suggests shares are currently trading on the lower end of fair value.

Analysts expect Hormel to have earnings of $1.76 for FY 2020 ending October 2020, and $1.85 for FY 2021.  The current price of $45.35 has shares valued at 25.8x and 24.5x forecasts, respectively.  Using the EV/EBITDA shares look richly valued at 18.2x.

The return from an investment is comprised of 3 parts: growth in earnings + dividend yield + changes to valuation.  Before accounting for valuation changes, Hormel could potentially produce 5.3% annualized returns; although the question right now is whether valuation changes are going to be a head or tail wind on future returns.  

Wrap Up

This raise increased my forward dividends by $9.27 with me doing nothing.  That's right, absolutely nothing to contribute to their operations.  Based on my Rollover IRA's current yield of 2.18% this raise is like I invested an extra $426 in capital.  Except that I didn't!  One of the companies I own just decided to send more cash my way.  

That's how you can eventually reach the crossover point where your dividends received exceed your expenses.  That's DIVIDEND GROWTH INVESTING AT WORK!  The beauty of the dividend growth investing strategy is that you build up your dividends through fresh capital investment as well dividend increases from the companies you own.

My FI Portfolio's forward-12 month dividends are $7,771.69.  Including my FolioFirst portfolio's forward dividends of $101.12 brings my total taxable accounts dividends to $7,872.81.  My Roth IRA's forward 12-month dividends are $629.93.  My Rollover IRA's forward dividends increased to $2,343.75.  Across all accounts I can expect to receive $10,846.49 in dividends over the next year.

I've also started compiling dividend data on many of the companies that I own or would like to own.  Hormel's can be found here which includes the dividend history (as far back as I can find without spending hours hunting it down), rolling dividend growth rates and dividend yield theory.  To see other companies that I've already gathered the data on you can check out the Dividend Companies page.  Check it out and let me know what you think.

Do you own shares of Hormel?  How has dividend growth for you holdings fared in 2019?

Please share your thoughts below.