Making money in the stock market isn't hard -- there are
hundreds of successful investing strategies out there. But ask
any investor how to keep investors consistently safe and
profitable, and it's a different game.
To find safe and profitable stocks that weather the storms
that come and go through bull and bear markets, I look for
high-quality investments with low volatility.
In this light, my favorite investments in today's market are
stocks that steadily pay dividends.
When you buy a dividend-paying stock, you should be concerned
about a company's expected growth and the stability of its
dividend payments. I typically look for stocks that have a strong
history of consistent dividend payments.
This requires looking at a company's earnings trends. As a
company becomes more profitable, it increases the likelihood of
paying -- and growing -- dividends.
In addition, the company should be safe. This means it should
provide a recession-proof product or service. For example,
consumer staples companies such as
Kimberly-Clark Corp. (
are always safer picks than some riskier small caps or pharma
But one of my favorite sectors to find safe and steady
dividend payers is the food industry.
Think about it, people need to eat no matter how the economy
And one of the most sought-after food products is meat. The
demand for meat has been steadily increasing since 1960. In
developing countries, meat consumption has been continuously
increasing from a modest average annual per capita consumption of
10 kg (22 pounds) in the 1960s to 26 kg (57 pounds) in 2000 and
will reach 37 kg (81 pounds) around the year 2030, according to
Food and Agriculture Organization (FAO).
And of the meat companies, my favorite is a classic dividend
Hormel Foods (
. The stock has consistently paid dividends for 47 consecutive
Investors who purchased $100,000 worth of the stock on Jan. 2,
1990, would have gained $2,910 annually with a yield of about 3%.
This yield might have not meant much in 1990, but fast forward to
today and you will be amazed at the compounding effect on the
Take a look at the table below...
Today, the stock yields about half that. That's because as you
probably know, as a stock's price rises, its yield falls. The
stock has had significant growth, so its share price has risen
dramatically to nearly $40. Despite a much larger annual dividend
today (68 cents a share vs. 6.5 cents a share in 1990), its yield
has fallen yet income has increased substantially.
Bond investors, however, enjoyed a steady 8% income for 23
years, but they were shocked when they had to renew their
investment at a measly 2.7% after 20 years.
Take a look at the stock's nice 177% run since 2006…
Hormel is a leader in its industry because it trumps the
competition by selling value-added meat products, as opposed to
distributing solely raw meats and other commodities. Hormel's
notable brands include Spam, Jennie-O, Country Crock, Lloyd's and
Here are a four other reasons I like the stock…
It focuses primarily on convenient products, which are in high
demand today with so many people on the run. This should be a
growth opportunity for Hormel as more people are eating meals at
home and looking for time-saving meal options.
In January, Hormel purchased Skippy -- the 81-year-old peanut
butter maker -- from Unilever for about $700 million. This should
allow Hormel to expand its brand across the globe further, as
Skippy is sold in more than 30 countries.
3. Lean supply chain
Hormel has a strong, vertically integrated supply chain that
takes advantage of economies of scale. This keeps new competitors
from eating into Hormel's current market share. For example,
Hormel raises about 70% of the turkeys needed to meet sales
volume. This lowers its costs and allows it to have a competitive
4. Strong financials
Hormel's financial health is very impressive. At the end of 2012,
its current and quick ratios were about 3 and 1.7, respectively.
As a quick background, the current ratio is used to calculate the
company's ability to payback its short-term liabilities (bills,
debt, etc.) with its short-term assets. The higher the current
ratio, the more capable the company is of paying back its
obligations. The quick ratio shows a company's ability in quickly
converting inventory into cash.
With EBITDA covering interest expense almost 70 times at the
end of 2012, it looks like Hormel is in great shape for the
future. Hormel's forward price-to-earnings (P/E) is low -- at
roughly 17, compared to the industry average of 27.
In addition, Hormel's operating margins should continue to
average around 10% during the next few years as a result of its
recent success in generating cost savings throughout the supply
Risks to Consider:
As the food industry becomes more competitive, Hormel has
been forced to allocate a great deal of spending on product
innovation and marketing support, which could lessen
profitability and squeeze margins in the future. Also, surging
commodity prices for soybean and corn could dramatically increase
Hormel's feed costs, which would pressure margins. In this
slow-growth economy, retailers have more negotiating power,
making it more difficult for Hormel to raise prices.
Action to Take -->
Hormel Foods is a good buy up to $42 a share. With a current
dividend of 1.6%, investors should be able to count on consistent
income as it has raised its dividend each year since 1967. The
company is still well positioned to continue its impressive 15%
annualized growth rate.
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