How Safe Is Hormel Foods Dividend?

Hormel Foods (NYSE: HRL) recently celebrated its 125th year of doing business as a meat processor and food products specialist. That streak is a testament to its strong market position and the balanced portfolio of brands, including Spam, Applegate, and Skippy, that management has assembled and supported over the years. Hormel's 51 consecutive years of annual dividend hikes shows just one way in which shareholders have benefited from those strengths.

While that record isn't in jeopardy of ending any time soon, it's still worth looking at Hormel Foods' dividend. After all, the company is on pace for a rare earnings decline this year due to soaring commodity meat prices.

Operating and dividend history

Hormel hasn't enjoyed much revenue growth over the past few years. In fact, sales are up just 16% since 2012 for a compound annual growth rate of below 4%.

Yet its earnings have risen sharply thanks to the company's cost cuts and its strategic shift toward value-added, branded food products and away from commodity turkey and pork products. Earnings per share jumped by 30% last year to pass 9% of sales. That represents a dramatic improvement over the 6% profitability Hormel saw in fiscal 2012.

The dividend has run slightly ahead of that hefty earnings growth, rising by 17% last year and by 26% the year before. The payout has grown at a 15% compound annual rate over the past decade, which includes several weak profit years around the 2008-2009 recession.

Its annual yield is just above 2% today, which is about what an investor could achieve by owning an index fund that tracks the broader market. Hormel's yield puts it ahead of meat specialist Tyson Foods but below branded food giants like Smucker's and Campbell Soup.

Where the dividend goes from here

Hormel's latest results imply modest dividend gains ahead. Sales are up by just 2% over the past nine months, and spiking costs on pork and beef products led management to lower their profit outlook for 2017 in late August. The company now sees earnings coming in at between $1.54 per share and $1.58 per share, compared to the prior range of between $1.65 per share and $1.71 per share. "In the face of a challenging year," CEO Jim Snee said in a press release, "we are focused on our strategic initiatives and are committed to maintaining a long-term perspective."

Those initiatives include price cuts, investments in product innovation, and an aggressive pace of acquisitions that saw Hormel recently add the Fontanini and Ceratti specialty meat brands to its portfolio.

Meanwhile, there's very little risk of a cut or pause in this dividend. The company's $0.68 per share dividend commitment would still amount to less than half of earnings even if Hormel only manages to hit the low end of its annual profit guidance. The payout is also well covered by cash flow. Hormel generated over $500 million of operating cash in the past nine months, or about double the dividend payment over that time.

Thus, while the company's earnings are set to decline this year for the first time since 2008, the worst that income investors are likely to see is a smaller dividend boost next year. The magnitude of annual raises from there will depend on how well the company anticipates and responds to rapidly shifting consumer tastes for packaged foods.

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Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.