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In the consumer staples sector, most investors tend to stick with the biggest companies like Procter & Gamble (NYSE: PG). And while mega-cap stocks such as P&G have undoubtedly proven themselves, there may be even better opportunities among some smaller companies.
Income investors with a fondness for dividend growth may want to add Hormel Foods (NYSE: HRL) to their portfolios. Hormel has a $17 billion market capitalization, which means it flies under the wings of much bigger companies like P&G. But Hormel has a long history dating back to 1891.
Here’s how Hormel has managed to deliver impressive returns over such a long period of time.
A Portfolio of Strong Brands
Hormel might not immediately ring a bell, but the company has a large number of strong brands. They include its canned goods like Spam and Hormel Chili, along with Skippy and Chi-Chi’s.
Hormel has added to its fresh meats category in recent years with brands like Jennie-O turkey products, and refrigerated foods, including Hormel pepperoni and bacon. Hormel also has a specialty products group which includes Muscle Milk protein drinks.
It’s likely that one or more Hormel products can be found in nearly every household across America. Over time, Hormel has built up an impressive product portfolio through acquisitions. These bolt-on deals have driven long-term earnings growth, which has fueled its impressive dividend growth.
Hormel Acquisitions Drive Growth
Hormel’s long-standing practice is to acquire strong brands at attractive prices, and use synergies in production and distribution to drive margin expansion. As a result, Hormel has generated strong earnings growth for many years. According to the company, it achieved 12% annual earnings growth from 2009 to 2014.
A good example of its acquisition strategy is its recent takeover of Applegate Farms, an organic foods company, for $775 million. This acquisition made sense for Hormel on a number of fronts. First, Applegate Farms is a leader in organic foods, which opens up a whole new growth category for Hormel.
According to the press release from Hormel shortly after the acquisition, Applegate is the No. 1 brand in natural and organic valued-added prepared meats. Operationally, Applegate’s products, which include bacon, hot dogs and deli meats, will fit perfectly into Hormel’s existing meat product portfolio.
Financially, the deal made sense as well. Hormel got a good price for Applegate. Applegate expects to generate approximately $340 million in sales this year. That means Hormel paid slightly more than two times sales for Applegate, which is a modest multiple for a high-growth business.
The deal should add to earnings very quickly. Hormel expects the acquisition to be EPS neutral this year, then be accretive to EPS by approximately $0.07 to $0.08 in fiscal 2016.
The Proof Is in the Pudding (or Spam)
Hormel’s long-term strategy has driven outstanding returns for its investors. Last quarter, Hormel reported record sales volumes and diluted earnings per share. The company also raised its guidance for the full year, and expects 15% to 18% growth in adjusted earnings in 2015.
With its steadily rising profits, Hormel has richly rewarded its shareholders with a rock-solid dividend. In fact, this dividend stock has paid 349 consecutive quarterly dividends, dating back to the company’s 1928 incorporation. And, Hormel has raised its dividend for an impressive 49 years in a row.
Hormel stock currently yields 1.5%, which is slightly below the stock market average dividend yield. But Hormel is a powerful dividend growth stock. Over the past five years, it has increased its payout by 18% per year.
While Hormel may not be the best pick for dividends right now, in a few years, its dividend yield could grow substantially. As a result, dividend growth investors should take a closer look at Hormel.
Dividends for Every Month of the Year
If you’re looking for just one dividend stock to round out your income stream, consider a little-known company that pays out dividends 12 months of the year.
Click here to see the full details of this company in my Dividend Calendar…