Dividends can provide more information than just a read on the income a stock will generate. Specifically, when a stock's yield is high relative to its yield history, it can indicate a buying opportunity. Yield anomalies like this are even more compelling when the company in question has a long history of annual dividend increases, too. This is why, if you like dividends, you'll love ExxonMobil Corporation (NYSE: XOM), Hormel Foods Corporation (NYSE: HRL), and General Mills, Inc. (NYSE: GIS).
1. A plan to fix the problem
ExxonMobil is one of the largest integrated energy companies on the planet. It currently offers investors a yield of 4%, toward the high end of the company's historical yield range, which is the highest it has been since the mid-1990s. Exxon has increased its dividend annually for 36 consecutive years, including through the deep oil downturn that started in mid-2014 -- something that most of its direct peers failed to do.
The yield is so high because Exxon has stumbled upon hard times. Production growth has turned negative over the last couple of years (average daily production was 11% lower in the second quarter compared to 2015 levels), it hasn't been using its shareholders' money as effectively as it used to (return on capital employed has fallen from above peer levels to middle of the pack), and the fixes for these problems will take time to implement.
Things look pretty bad today. But that's exactly why you can get Exxon with a 4% dividend yield. If you are willing to take the long view and collect that relatively large yield while you wait for better days, the oil giant has a few positives to consider. For example, it remains conservative, with long-term debt at just 10% of the capital structure. And it has an impressive history of industry-leading execution, which it plans to put to better use by taking greater control of its most important growth projects. Moreover, it isn't willing to take shortcuts to appease Wall Street, focusing on the highest-value opportunities over more expedient, less profitable oil exploration.
Exxon's current investment plans reach out to 2025. By that point, the company thinks it can double earnings or more (depending on oil prices). It's a long time to wait, but the large yield should reward investors well for their patience.
2. Protein problems
Hormel Foods is a packaged food company with a focus on meat and other proteins. The current yield is roughly 2%, low on an absolute level but at the high end of its historical yield range. The dividend has been increased for an incredible 52 consecutive years.
The food maker is facing a number of troubles today. Consumer tastes are shifting toward fresher and natural products and away from one of Hormel's most important brands, SPAM. Supply and demand have been out of balance in key businesses, including turkey. Rising costs have been difficult to pass through to customers because of low inflation. And more recently, trade tensions have led to concerns about the company's global expansion plans, notably in China.
However, Hormel isn't sitting still. It has been shifting its portfolio for a number of years by acquiring more desirable brands like Wholly Guacamole and Columbus Meats (expanding its presence in the fast-growing deli aisle). It's also been innovating, bringing out new versions of its wares, such as Skippy P.B. Bites that turn peanut butter into a snack. And perhaps most important, it remains conservative, with long-term debt at roughly 10% of the capital structure even after relatively large acquisitions like Columbus.
There's no question that Hormel is facing troubles today, but it has industry-leading brands and the financial strength to weather a tough spell. If history is any guide, it will adjust its portfolio to meet consumer demands, supply and demand will work itself out, and it will pass rising costs on to customers eventually. In the meantime, you can collect a relatively large yield that has grown at an impressive annualized rate of 16% or more over the trailing 1-, 3-, 5-, and 10-year periods (more than five times the historical rate of inflation growth). Notably, that includes the current industry weak spell.
3. A bit more risk
Last up is General Mills, one of the world's largest packaged food companies. It has increased its dividend for just 14 consecutive years. However, a dividend has been paid without interruption for over 100 years. The yield is around 4.2% today. You have to go back to the late 1990s to see higher yields.
Like Hormel, General Mills is facing changing consumer tastes and pricing headwinds in the face of rising costs for things like shipping. And like Hormel, General Mills isn't sitting still. It has been working to cut costs and introduce new products that better align with customer tastes (such as healthy snacks and new varieties of yogurt) and has been using acquisitions to expand into new areas (Annie's and, more recently, Blue Buffalo to enter into the fast-growing healthy-pet-food space).
With more than 100 years of history behind it, General Mills has changed with the times before and is likely to do so again this time around. However, there is one concern here that investors should watch: debt. General Mills has historically used leverage more aggressively than peers like Hormel. And the Blue Buffalo acquisition was costly, leading some to wonder if General Mills overpaid. What is for certain, however, is that long-term debt increased by around 66% in fiscal 2018 because of the pet food deal. That has investors justifiably worried.
General Mills is aware of the issue and plans to put dividend increases on hold while it works to reduce leverage. Still, a lot is riding on this large acquisition, which the company is relying on to spur top-line growth. If you are willing to give a more-than-100-year old company the benefit of the doubt and keep a close eye on leverage, you can collect a hefty yield while you wait for it to prove that it can make Blue Buffalo work just as well as it did Annie's a few years ago.
Buying when others are fearful
There's no question that investors are worried about Exxon, Hormel, and General Mills today. There are good reasons for those concerns. However, all three are important players in their respective industries and niches and have long histories of successfully navigating problems over time. The fixes may take time to play out, but that's why long-term investors looking for dividend income have the opportunity to buy today at such high relative yields. If you can see past the current problems to a brighter future, you can benefit from investors who are thinking only about the short term.
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