Companies that make and sell products we all use on a regular basis have been some of the best performing stocks to hold over long periods of time. Their stable businesses mean consumers buy their products regardless of the economic climate.
In addition, that financial stability is often accompanied by steady dividend payments, year in and year out. Over many decades, those dividends add up to huge returns for shareholders. One such company that exhibits all these qualities is Hormel Foods Corporation (NYSE:HRL), which, until recently, was on a nearly uninterrupted rally.
On June 18, Hormel cut its fiscal 2013 profit outlook, sending shares down more than 3% on a day in which the Dow rose nearly 140 points. Should investors put this food stock back on the shelf? Or is there still reason to add Hormel to your shopping cart?
Hormel: A long and proud history
Hormel Foods Corporation (NYSE:HRL) is a company that likely flies under the radar of many investors. That’s because in the packaged food space, it’s a smaller competitor to industry giants like Kraft Foods Group Inc (NASDAQ:KRFT) and ConAgra Foods, Inc. (NYSE:CAG).
That being said, Hormel is a company with a long history of satisfying its hungry customers and shareholders alike.
Hormel was founded in 1891, and has since sold its flagship Spam and Hormel Chili to consumers. However, the company has broadened its product portfolio over the years. The company holds the Jennie-O brand, and earlier this month announced the acquisition of the Skippy peanut butter line.
Moreover, Hormel Foods Corporation (NYSE:HRL) has an enviable dividend track record: the company has provided investors an astounding 47 consecutive years of dividend increases.
The grocery aisles are packed with competitors
ConAgra has a market value of $14 billion and many household brands, including Healthy Choice, Hebrew National, and Del Monte. ConAgra’s consumer brands can be found in 97% of America’s households, and 28 of them are ranked first or second in their category.
ConAgra has executed strongly for many years, and its shareholders have benefited handsomely. The company was founded all the way back in 1919 and has demonstrated a clear intention of rewarding shareholders. Last year, the company raised its dividend by 4% and yields nearly 3% at recent prices. Moreover, ConAgra realized 8% sales growth in 2012.
Kraft, meanwhile, almost needs no introduction. The $33 billion packaged food giant holds a stable of brands that can be found in virtually every household in America. Some of these include Miracle Whip, Jell-O, Oscar Mayer, Planters, and Velveeta.
From its humble beginnings in 1903, Kraft has steadily grown into the food conglomerate it is today. Shareholders have been enriched along the way. In its current form post-spin off, Kraft recently declared a $0.50 per share dividend, amounting to a solid 3.6% yield at recent prices.
Of course, Hormel Foods Corporation (NYSE:HRL) is no slouch either. According to the company, Hormel has achieved 11% annual earnings per share growth from 2007 to 2012, along with 6% sales growth over the same period.
A bump in the road, or something more serious?
Unfortunately, all is not well for Hormel. The company cut its fiscal 2013 profit outlook, due primarily to higher input costs, and disappointing results from its pork operations.
All told, the company now expects earnings per share this year to fall between $1.88 per share and $1.96 per share, down from the previous range of $1.93 per share to $2.03 per share.
I wouldn’t overreact to this news. The midpoint of the new profit range represents just a 3% drop from the midpoint of the previous range. Moreover, Hormel Foods Corporation (NYSE:HRL)’s management expects sales gains in other segments as well as international growth to offset a good portion of the decline.
That being said, it’s often a helpful reminder that even great companies can be poor investments if the investor pays too high a price. While I admire Hormel Foods Corporation (NYSE:HRL) as a company, it’s extremely difficult to consider the stock a steal.
Frankly, as a die-hard value investor, I’m not willing to pay 20 times trailing earnings for a consumer goods stock offering single-digit sales growth and a sub-2% dividend yield.
The midpoint of its new 2013 profit range is $1.92 per share. I’m not willing to pay more than the market multiple for those earnings, which means I’d only be interested in Hormel Foods Corporation (NYSE:HRL) at around $32 per share. At that level, the stock would yield close to 2.2% and would present a better value than exists today. Hormel is a great company that will continue paying and raising its dividend for years, but for now I’m content to sit on the sidelines and wait for a better price.
Robert Ciura has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
The article Should You Lose Your Appetite For This Food Stock? originally appeared on Fool.com.
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