Buy This Undervalued Stock Before Everyone Else Does

Hormel Foods (NYSE: HRL) is not the most exciting food company in the world, with its most iconic brand most likely being SPAM. But don't sleep on this stock; it looks cheap today. And that remains true even though its dividend yield is a fairly modest, on an absolute basis, 2.45%. If history is any guide, meanwhile, the tides will eventually turn and this Dividend King should return to its old form.

Is it really cheap?

Hormel is not the type of company that most investors would place in the value category today with its price-to-earnings ratio of nearly 25. In fact, this food maker rarely falls into the value camp. But that doesn't mean that it doesn't look historically cheap. The stock's 2.45% dividend yield happens to be near its highest levels in recent history.

A person hugging a piggy bank.

Image source: Getty Images.

Dividends tend to be more consistent than earnings, so dividend yield may be a better indicator of value for reliable dividend payers. Hormel, for reference, is a Dividend King with over five decades of annual dividend increases under its belt. Those dividend payments, meanwhile, are highly desirable to the company's largest shareholder, the Hormel Foundation. This philanthropic entity owns just over 46% of Hormel's stock and was created by the founders to donate to charity and ensure that Hormel remains a stand-alone company -- the key being that the foundation uses the dividends it collects to make donations. Safe and steady is the desired approach for Hormel given this relationship.

And that's exactly what long-term dividend investors will probably find most appealing about the company. But don't think that means boring, at least for dividend investors. The average annualized dividend growth rate over the past decade was a heady 13%. Recent increases have been lower than that (more on what that is in a second), but if you are an income investor, rapid dividend growth can help your portfolio keep up, and in this case outdistance, inflation.

This is why the historically high yield on offer here should put Hormel on your buy list. And you'll want to act now, before Wall Street catches on to the deal being served up.

Why so high?

Hormel's yield is so high today because food stocks deal with significant headwinds. For example, inflation has operating costs on the rise. And supply chain disruptions have made it difficult to both get needed ingredients and to deliver products to retailers. Those are industrywide concerns, but they are having an impact on the company's performance. More specific to Hormel, the avian flu has been particularly brutal of late, leading to poor performance in the company's Jennie-O turkey business.

Without a doubt, there are reasons to be worried about near-term performance at Hormel. But long-term investors should probably see this as a buying opportunity. Inflation and supply chain issues will get solved over time. In fact, Hormel is already pushing through price increases to support its profit margins. Avian flu will also sort out over time and, frankly, it will be back again sooner or later if history is any guide. Like inflation, it's almost a part of the business environment if you operate in the poultry space.

Hormel is built to survive these types of industry headwinds, given that its largest shareholder is reliant on dividend income to support its charitable mission. A key issue of note here is the balance sheet, with Hormel's debt-to-equity ratio a solid 0.4 or so. That's actually high for the company, thanks to a large acquisition (Planters), but should head lower as the company pays down debt. Its investment-grade-rated balance sheet is basically built to ensure the company can keep paying the dividend no matter what the world throws at it.

Time to dig in

There's obviously a lot more to know about Hormel. However, if you step back and look at the company's strong finances, the desires of its largest shareholder, and its long history of rewarding dividend investors, you'll likely agree that it is a great company. And since great companies don't go on sale very often, the historically high dividend yield today should be extra enticing since it suggests Hormel is on the sale rack right now. When the business starts to perform better, meanwhile, dividend growth will likely accelerate again. Don't wait until everyone else figures this out; take the time to learn more about this attractive food maker today.

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Reuben Gregg Brewer has positions in Hormel Foods. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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