Image Source: Pixabay
 

Linked here is a detailed quantitative analysis of Hormel Foods Corp. (HRL). Below are some highlights from the above linked analysis:

Company Description: Hormel Foods Corp. is a multinational manufacturer and marketer of consumer-branded food and meat products.

Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value, see page 2 of the linked PDF for a detailed description:

1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number

HRL is trading at a discount to 1.) and 3.) above. When also considering the NPV MMA Differential, the stock is trading at a 5.3% discount to its calculated fair value of $26.02. HRL earned a Star in this section since it is trading at a fair value.

Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:

1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%

HRL earned two Stars in this section for 2.) and 3.) above. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45% HRL earned a Star for having an acceptable score in at least two of the four Key Metrics measured. The company has paid a cash dividend to shareholders every year since 1928 and has increased its dividend payments for 59 consecutive years.

Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA) or Treasury bond? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:

1. NPV MMA Diff.
2. Years to > MMA

HRL earned a Star in this section for its NPV MMA Diff. of $701 This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as HRL has. The stock's current yield of 4.71% exceeds the 3.75% estimated 20-year average MMA rate.

Peers: The company's peer group includes: Cal-Maine Foods, Inc. (CALM) with a 9.3% yield, Mondelez International, Inc. (MDLZ) with a 3.2% yield and ConAgra Foods, Inc. (CAG) with a 7.4% yield.

Conclusion: HRL earned one Star in the Fair Value section, earned two Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of four Stars. This quantitatively ranks HRL as a 4-Star Strong stock.

Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $27.17 before HRL's NPV MMA Differential decreased to the $500 minimum that I look for in a stock with 59 years of consecutive dividend increases. At that price the stock would yield 4.3%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $500 NPV MMA Differential, the calculated rate is 1.6%. This dividend growth rate is below the 2.7% used in this analysis, thus providing a margin of safety. HRL has a risk rating of 1.25 which classifies it as a Low risk stock.

HRL's brands include Hormel, Spam, Jennie-O, Country Crock, Lloyd's, and Chi-Chi's. In addition, HRL has expanded into a non-meat category with the acquisition of the Skippy brand from Unilever. The company has defined a niche on which it converts commodity meats to value-added packaged products. This has allowed the company to achieve superior results when compared with other meat processors.

The company has a relatively strong balance sheet, with minimal debt and generates strong cash flows (even during the recession), though at 102% (up from 69%) its Free Cash Flow Payout is above my maximum desired level of 60%. However, its Debt To Total Capiital of 26%,is well below my maximum. Like most in the industry, the company has a high sensitivity to changes in commodity costs. The company should enjoy above average long-term growth and stability of earnings and dividends, with HRL's non-U.S. sales taking a more prominent role. The stock is currently trading at a 5.3% discount to my calculated fair value price of $26.02. Its dividend yield is above my desired minimum, so is is a stock I will continue to watch.

More By This Author:

Dividend Stock Analysis: Johnson & Johnson
Dividend Stock Analysis: Realty Income Corp.
Dividend Stock Analysis: Exxon Mobil Corporation