Dividend stocks with high yields are often a red flag. When investors don’t trust the dividend, the share price falls, and the yield rises abnormally high. A company that consistently raises its dividend is a green flag. Increasing dividends signal management’s confidence in the business.
So, what happens when a Dividend King, a stock with 50 or more years of consecutive dividend growth, trades at its highest-ever dividend yield? That’s where Hormel Foods (NYSE: HRL) finds itself today.
The question is whether Hormel’s yield is an opportunity or a trap.
Here is what you need to know.
Hormel’s recent adversity
Hormel Foods sells a variety of packaged foods and meats to retailers and restaurants worldwide. Some of the company’s best-known brands include Spam, Skippy, Planters, Jennie-O, and Hormel-branded meat products. The company has been in business for generations, but you can see below how revenue and operating margins have trailed off recently. Note that the big jump in revenue was due to acquiring Planters in 2021.
HRL Operating Margin (TTM) Chart
What’s the culprit? The pandemic caused supply chain disruptions and inflation to pressure Hormel in 2022, which continued in 2023. Management has cited operational changes and investments to address the supply chain problems. This transformation, as management calls it, could create an additional $250 million in operating income by 2026.
Additionally, Hormel has dealt with challenging issues like bird flu and a soft market hurting its international business, especially in China. Fortunately, management is hoping this begins to recover in the fourth quarter of 2024. Hormel should ultimately be judged on its financial strength, because it can’t control something like bird flu or broad weakness in the market.
A solid start to 2024
Management had some good things to say when Hormel recently reported its earnings for the quarter ended Jan. 28. The company reaffirmed full-year guidance, citing growth in its food service segment and the expected rebound in international sales. Volume did jump 11% year-over-year on higher…
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