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Dividend growth stocks can generate long-term wealth because of a compounding effect and price appreciation. At the start of spring 2024, we discuss three that typically benefit from the warming weather.

We highlight three equities that are market leaders in their categories and have solid long-term growth prospects. We discuss The Coca-Cola Company (KO), Hormel Foods Corporation (HRL), and Constellation Brands (STZ) for a dividend growth portfolio.

Coca-Cola Company

The Coca-Cola Company (KO) is a classic dividend growth stock for spring 2024. It is the world’s largest non-alcoholic beverage company, operating in over 200 countries. Coca-Cola was founded in 1886 in Atlanta, Georgia.

It competes in every non-alcoholic beverage market segment with dozens of brands. Twenty-six brands are billion-dollar ones, like Coke, Diet Coke, Sprite, Fanta, Dasani, Costa, etc. The recent market share was 46.3% in the United States, with five of the top 10 selling carbonated soft drinks. Total revenue was $45,754 million in 2023.

Coca-Cola offers simple products for nearly everyone with high demand. Selling more cases, incremental price hikes, packaging innovation, and brand extensions raise the top and bottom lines. For example, smaller unit packaging can lead to higher volume and better margins. Similarly, the core brands can be expanded into niche or seasonal markets.

As the largest non-alcoholic beverage company, Coca-Cola also acquires smaller competitors, further consolidating the industry. Mergers and acquisitions permit the business to grow by leveraging its extensive marketing and distribution capabilities. For instance, the acquisitions of BodyArmor and Costa Coffee allowed Coca-Cola to expand its portfolio into areas where it has performed poorly or is not yet a large player.

As dividend companies go, Coca-Cola is a rock star. The firm is one of the longest running dividend stocks, and one of only 25 U.S. companies that have paid a dividend for 100+ years. Additionally, it is a Dividend King with a 62-year streak of increases. It most recently raised the dividend by another 5.4% in February 2024.

The flat share price and growing dividend have caused the dividend yield to reach approximately 3.2%. The dividend usually grows in the low-to-mid single digits annually. It is backed by an acceptable payout ratio of ~68%. Free cash flow of $9,747 million exceeds the dividend distribution of $7,952 million. The ‘B+’ dividend quality grade and the A+/A1, upper-medium investment grade credit ratings enhance the dividend safety.

Despite rising revenue and earnings, Coca-Cola’s share price has remained relatively flat since about mid-2022. It trades at a price-to-earnings ratio of ~21.5X, below the 5-year and 10-year ranges. However, consensus earnings are anticipated to rise in 2024 and 2025. Consequently, historical undervaluation, dividend safety, a nice yield, and a long dividend history make this equity a buy.

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Source: Portfolio Insight

Hormel Foods Corporation

As the weather warms, Americans barbecue, Hormel Foods Corporation (HRL) is well positioned to provide pork and turkey products for consumers. It owns brands like Hormel, Black Label, Jennie-O, Spam, Applegate, Sadler’s Smokehouse, Austin Blues, etc. The firm is the market leader in many categories. Spam has a 50%+ market share in shelf-stable meats, while Applegate and Jennie-O are numbers three and four in their segments. Besides pork and turkey products, Hormel owns the Planter’s brand with a 17% market share in nuts, and Skippy, the number two peanut butter in sales. Total revenue was $12,136 million in the last twelve months.

Hormel grows by acquisition and organically. The firm periodically acquires branded competitors and grows volumes through its distribution network. It has added Planters, Sadler’s Smokehouse, Columbus Craft Meats, Cerrati, and Fontanini in the past several years. The result is a growing market share of the protein brands sold in grocery stores. As a consumer staples company, Hormel also expands via brand extensions and product innovation. However, one risk is that Hormel still has exposure to commodity price fluctuations for inputs even though it is now a branded protein company.

Hormel is another popular dividend growth stock. It is a Dividend King with a 58-year streak of increases. The firm’s dividend yield reached roughly 3.85% as the share price declined. However, decent quarterly results and investor optimism caused the share price to rebound, and the forward yield is now 3.25%. The dividend is growing about 5% to 6% per annum. We do not expect that to change because of the 68% payout ratio.

Although the dividend safety is higher than our target value of 65%, the dividend safety is still excellent. The equity receives a ‘B’ from Portfolio Insight for its dividend quality. It also has an A-/A1 upper-medium investment credit rating, offering more confidence about safety. In addition, free cash flow of $968 million more than covers the dividend requirement of $601 million.

Hormel’s share price struggled because of poor results during and after the COVID-19 pandemic. In fact, the price reached about $30 per share, and simultaneously, the dividend yield soared to a decade high. Both have recovered, but Hormel’s stock is still undervalued based on historical metrics, which change hands 21.4 times earnings. As a result, we view Hormel as a buy.

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Source: Portfolio Insight

Constellation Brands

Constellation Brands (STZ) is probably less well-known than the other two companies. However, it is a giant in alcoholic beverages. The firm was much smaller, but in 2013, it acquired Modelo’s U.S. beer business with a perpetual license. Consequently, revenue, earnings, and free cash flow soared. Modelo Especial is now the number one selling beer in America. Besides Modelo, Constellation owns or controls the rights to sell Corona, Pacifca, Kim Crawford, Meiomi, Robert Mondavi, The Prisoner, SVEDKA, etc. Today, Constellation has nearly a $50 billion market capitalization, and revenue has reached $9,820 million. It is our third dividend growth stock for spring 2024.

The company grows organically by selling greater beer, wine, and spirit volumes through wholesale distributors and retailers. Packaging innovation, brand extensions, and new products grow revenue and earnings per share. The company can also purchase or license smaller brands and expand distribution.

Constellation only started paying a dividend in 2015 and has increased it for nine years, placing it on the Dividend Challenger list. The forward dividend yield is 1.3%, and the dividend is growing by about 5% annually. However, dividend safety is exceptional, with a 33% payout ratio and 41% free cash flow coverage. The equity also has a ‘B+’ dividend quality grade, meaning it’s in the 80^th percentile. We expect many more dividend increases because of the high dividend safety.

The stock is trading at a P/E ratio of about 20X, within its range over the past decade. Hence, it is not terribly undervalued, but investors should consider this equity due to its market leadership and dividend growth potential.

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Source: Portfolio Insight

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