Hormel Foods Corporation Is a Strong Buy Thanks to the Tax Plan
March 28, 2018 – by Richard Band
Hormel Foods Corporation (NYSE:HRL) is one of the nation’s top processed foods companies. And it is not only a dividend aristocrat (a company that has raised its dividend for more than 25 years) but a dividend king (a company that has raised its dividend for 50 years or longer).
That is a very elite group of stocks.
They’re elite not only for increasing their dividend for that amount of time, but to remain a significant player for five decades reveals something about this company’s mettle.
Founded in 1891 in Austin, Minn., Hormel is one of those companies that was growing its business before the Federal Reserve was established (in 1913). These were wild days in the economy in general and the stock markets in particular. Boom and busts were commonplace.
To make it as a company, you had to be resourceful, forward-thinking and you had to be smart enough to know what good opportunities were and jump on them. But you also had to be shrewd and keep your powder dry so that you could survive and expand during the bad times.
After 127 years, HRL has proven its ability to deal with trouble and change.
For example, the new corporate tax plan that was passed in December was a boon to HRL. It means that instead of paying 33% on its revenue, it now only pays between 17.5% and 20.5%. That’s a boost of around $140 million in cash flow and makes its 2.2% dividend even more secure.
While the business has been growing slowly in recent quarters, it has kept raising its profitability, which is a good sign, and not unexpected from the smart management team.
Two recent moves that illustrate how well HRL anticipates its branding efforts is its moves into to growing sectors — health foods and Latin foods.
In recent years, HRL has acquired the brands Muscle Milk, Applegate and Columbus, which are focused on consumers looking for healthy alternatives to standard mass produced drinks and meats.
On the Latin food side, its MegaMex division is a joint venture between Hormel and Mexican food giant Herdez del Fuerte. MegaMex runs the Herdez brands in the U.S. as well as Chi Chi’s and Wholly Guacamole.
As Latin consumers continue to increase their buying power, they are looking for familiar brands and HRL is building quite a portfolio. Also, remember that salsa is now a more popular condiment in the U.S. than ketchup, so this ethnic food movement is much bigger than one demographic group.
The one challenge will be the looming trade war with China. The U.S. has proposed $50 billion in tariffs on Chinese industrial metals and the Chinese have countered with $5 billion (to start) specifically targeted at U.S. pork, chicken, soybean and wine producers.
But considering Hormel’s history of navigating treacherous markets over the centuries, this is a good time to make a long-term buy.
Richard Band’s Profitable Investing advisory service helps retirement savers outperform the market without losing a minute of sleep along the way. His straightforward style and low-risk value approach has won seven Best Financial Advisory awards from the Newsletter and Electronic Publishers Foundation.