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Hormel Foods: Uninterrupted Dividends Since 1928

Hormel Foods (HRL) was founded in 1891 and has proven to be one of the most resilient food providers in the world. The company’s brands include Skippy peanut butter, SPAM meat, Dinty Moore stew, Wholly Guacamole dips, Jennie-O turkey, and numerous Hormel-branded meat products.

Perishable products (fresh meats, frozen items, refrigerated meals) account for 56% of Hormel's revenue, followed by poultry (19% – turkey), shelf-stable goods (19% – canned meats, peanut butter, hash, stews, chips, etc), and miscellaneous products (6% – nutritional food products, dessert and drink mixes, etc).
Source: Hormel Annual Report
Over 90% of Hormel's sales are derived in North America. Most of the firm's products end up on retail grocery shelves, but a meaningful portion (30% of revenue) are sold to foodservice operators and delis (about 10% of sales).

Hormel has raised its dividend for 53 consecutive years, making it a dividend king. The company has also paid uninterrupted dividends since 1928.

Business Analysis
Few companies survive for more than 125 years. Hormel's competitive advantages are not about patents or intensive spending on new product development (the company only invested $34 million on R&D last year, representing less than 0.4% of revenue).

Instead, as one of the largest consumer-branded food and meat producers, Hormel’s key to success is favorably altering customers’ perceptions of its products to gain loyalty and market share. The company routinely spends around $150 million on advertising, an amount nearly five times greater than Hormel’s spending on R&D.

With many of its brands dating back over 50 years (e.g. SPAM and Dinty Moore were introduced in the 1930s) and supported by billions of advertising dollars over the years, many consumers have come to know and trust Hormel's products. 

As a result, more than 40 of Hormel’s brands have No. 1 or No. 2 market share positions in their respective categories. The company estimates that No. 1 or No. 2 brands represent approximately 60% of Hormel's retail sales.

Nevertheless, new product innovation is still important to Hormel. By expanding the company's portfolio of well-known brands into new categories, the company expects by 2020 to generate 15% of revenue from new products launched within the past five years.

For example, the company introduced Skippy Peanut Butter Bites in 2017, taking advantage of the Skippy brand's popularity to serve the quick-snack crowd. 

Hormel also benefits from economies of scale. As one of the larger players in the market, Hormel is able to achieve lower production costs than smaller rivals and squeezes more value out of each advertising dollar it spends by extending popular brands into adjacent product categories. Extensive regulations by the U.S. Department of Agriculture also disadvantage smaller competitors.

Hormel's global distribution channels and economies of scale also help the company’s growth and diversification efforts. Hormel has made a number of acquisitions in recent years to expand its business, including:

  • $220 million for Wholly Guacamole in 2012
  • $700 million for Skippy Peanut Butter in 2013
  • $775 million for Applegate organic deli meats in 2015
  • $286 million for Justin’s organic peanut butter in 2016
  • $425 million for food service business Fontanini in 2017
  • $850 million for Columbus premium deli meats in 2017

Hormel can sell these new brands and products to its existing customers and improve the cost profile of each acquired company once they are integrated. While meat-based offerings will always be core to the company, many of the firm's acquisitions have expanded its non-meat portfolio as well.
Source: Hormel Investor Presentation

Besides carefully selecting the brands and product categories it plays in to improve profitability, Hormel has a strong track record of cutting costs and becoming more productive. Hormel’s corporate culture emphasizes long-term profit maximization, which has allowed it to generate some of the strongest and most consistent profitability in the industry.

Combined with both organic and acquisition-fueled growth, Hormel has managed to achieve positive earnings growth with consistency that few other companies can match.
Source: Hormel Investor Presentation
Part of what explains Hormel’s impressive track record is the company’s unique corporate culture. Jay C. Hormel, the founder of the company, believed that corporations exist to serve the interests of all stakeholders, not just shareholders. That’s why he founded the Hormel Foundation in 1941, which over the past 75-plus years has donated more than $225 million to charities in the Austin, Minnesota, community.

Today the foundation owns around 5% of outstanding shares and 48% of voting control in the company, ensuring that the company is always focused on growing long-term decision making to enrich investors as well as its local community.

This helps explains why Hormel has such a balanced capital allocation strategy, in which management spends the company’s cash flow on a good mix of organic growth, acquisitions, as well as capital returns to shareholders (including the Foundation), including its notable 53-year dividend growth streak.

Management is confident Hormel can continue improving its profitability, cash flow, earnings, and dividends going forward. When combined with the company's renewed dedication to R&D and more focused brand advertising, Hormel has reasonable potential to continue growing at a similar pace in the coming years, with top and bottom line growth of 5% and 10%, respectively.
Source: Hormel Investor Presentation
If Hormel can achieve its long-term growth objectives, then investors can likely expect many more years of consistent dividend increases. As long as consumers need to eat, Hormel's well-known brands will be there for them.

But while Hormel is a well-run company with many positive attributes, several risks could affect the firm's long-term growth potential. 

Key Risks
While Hormel’s dividend king status and continued strong execution make it a fundamentally low-risk company to invest in and arguably one of the best consumer foods companies in the market, there are nonetheless some challenges the company will have to contend with in the coming years.

For one thing, while Hormel has done an admirable job diversifying away from traditional commodity meats and into higher margin value-added brands such as Jennie-O, Justin’s, and Applegate, around 10% to 15% of its product mix is still in relatively commoditized meats. It’s harder for Hormel to maintain stronger pricing power in these areas, especially in an age of changing consumer preferences.

For example, today more consumers are avoiding the center of the grocery store (i.e. pre-packaged foods) in favor of the fresher, outer rim of the store. The company notes that approximately 40% of its total sales are in the perimeter of the store, which is better than many of its peers but could still create growth headwinds as consumer preferences continue evolving. 

In addition, while Hormel raises a lot of its own pigs and turkeys, which decreases its exposure to commodity prices, feed prices for those animals are still outside management’s control, as are pork and turkey prices. Commodity price volatility can cause Hormel's short-term growth to sputter.

Next, it's worth mentioning again that over 50% of the company’s sales are derived from grocery stores. Hormel doesn’t just have to deal with competing products from rivals, but it also must work with large grocery chains such as Walmart (WMT) and Kroger (KR).

As disruptive e-commerce giants such as Amazon (AMZN) potentially make a stronger push into America’s grocery market, large grocery chains could put increasing pressure on Hormel to lower its wholesale prices so that they can compete with Amazon’s ultra-low prices and invest in their own digital operations.

This would make it even more important for Hormel to squeeze out more and more efficiencies from its production lines in order to achieve the kind of long-term earnings growth management is targeting.

Which brings up the final notable risk, Hormel’s steadily increasing size. In order to move the growth needle, Hormel will likely have to accelerate the pace of its acquisitions in the future, either by purchasing smaller niche brands more frequently or buying larger, more established businesses.

The problem is that at the higher end of the packaged food industry it’s often much harder to find good values, thanks to today’s cheap cost of capital and large-caps such as Kraft Heinz (KHC) and Tyson Foods (TSN) bidding up the prices required to close such deals.

In addition, a lot of Hormel's success in previous acquisitions came from buying underperforming brands such as Skippy peanut butter, which despite being the No. 2 brand in America was suffering from mismanagement and underinvestment. That made it a great acquisition candidate with plenty of low-hanging fruit when it came to taking out costs and making brand-building investments.

Going forward, Hormel may not be able to find enough high-quality brands available at a good value that fit management’s strict capital allocation criteria, potentially resulting in slower earnings growth in the future.

Closing Thoughts on Hormel
When it comes to proven track records, quality management teams, and shareholder-friendly corporate cultures, it doesn’t get much better than Hormel Foods.

The company owns a more on-trend product portfolio compared to many other food giants, positioning it better to deal with consumers' increasing tastes for fresher, healthier, and organic offerings. 

When combined with Hormel's solid balance sheet, numerous opportunities for long-term growth, recession-resistant portfolio of well-known brands, strong profitability, and impressive dividend growth track record, this seems like a business that will almost certainly be around for a long time to come. 

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