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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 discount to 1.) and 3.) above. When also considering the NPV MMA Differential, the stock is trading at a 15.3% premium to its calculated fair value of $26.3. 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 two Stars in this section for 2.) and 3.) above. 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 58 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
The NPV MMA Diff. of the $286 is below the $500 target I look for in a stock that has increased dividends as long as HRL has. If HRL grows its dividend at 2.7% per year, it will take 1 years to equal a MMA yielding an estimated 20-year average rate of 3.75%. HRL earned a check for the Key Metric 'Years to >MMA' since its 1 years is less than the 5 year target.
Peers: The company's peer group includes: Cal-Maine Foods, Inc. (CALM) with a 3.2% yield, Mondelez International, Inc. (MDLZ) with a 2.9% yield and ConAgra Foods, Inc. (CAG) with a 5.1% yield.
Conclusion: HRL did not earn any Stars in the Fair Value section, earned two Stars in the Dividend Analytical Data section and did not earn any Stars in the Dividend Income vs. MMA section for a total of two Stars. This quantitatively ranks HRL as a 2-Star Weak stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $26.65 before HRL's NPV MMA Differential increased to the $500 minimum that I look for in a stock with 58 years of consecutive dividend increases. At that price the stock would yield 4.2%.
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 4.1%. This dividend growth rate is above the 2.7% used in this analysis, thus providing no margin of safety. HRL has a risk rating of 1.25 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 has 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.
The company has a relatively strong balance sheet, with minimal debt and generates strong cash flows (even during the recession), though at 69% (down from 72%) its Free Cash Flow Payout is above my maximum desired level of 60%. Like most in the industry, the company has a high sensitivity to changes in commodity costs. The company should enjoy above average long-term growth and stability of earnings and dividends, with HRL's non-U.S. sales taking a more prominent role. The stock is currently trading at a 15.3% premium to my calculated fair value price of $26.30. Its dividend yield is below my desired minimum, so I will continue to watch this stock from the sidelines.
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 held no position in HRL (0.0% of my Dividend Growth Portfolio).
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Tags: HRL, CALM, MDLZ, CAG,