Introduction

As a dividend growth Investor, the best companies to invest in are quality companies that show a history of growing revenues and cash flow to enable them to increase their dividends over time. In addition, dividend increases act as a hedge against inflation as investors are technically getting a raise each year the company increases its dividend. Companies like Hershey (HSY) are known worldwide and appear on the surface to be quality companies. Indeed a good start, but before parting with hard-earned cash, it is always wise to carry out your due diligence on a company. This dividend stock review will look at the Hershey Company’s business units to see how it makes money and potential future catalysts.

As dividends come from cash to investors, the financial statements are critical to the due diligence process, with particular attention paid to the balance sheet and cash flow.

Brief Introduction About Hershey

In 1984, Milton Hershey first introduced Hershey as a Lancaster caramel subsidiary under Hershey Chocolate Company. The company has grown to become the largest producer of chocolate and confectionery products in the United States. 

Besides chocolates, the company also bakes cakes and cookies, sell beverages such as milkshakes, and other products. Popular brands include Hershey’s, Reese’s, Kisses, Cadbury, Ice Breakers, Kit Kat, Almond Joy, Jolly Rancher, Twizzlers, Good’ n’ Plenty, Heath, Whoppers, and Milk Duds.

Hershey’s company headquarters is located in Hershey, Pennsylvania, and distributes its products all over the U.S. and more than 60 countries globally. The company has massive distribution centers, uses modern technology and industry management systems to run its processes and product production.

According to Warren Buffet, a tycoon, investor, and Berkshire Hathaway’s CEO, two significant rules should govern your investment, and they are;

• Don’t lose money 
• remember rule number one. 

Here’s a detailed overview of Hershey as a dividend stock to help me if it’s worth my investment.

Source: Hershey Investor Presentation

Hershey Recent Results and Growth

Hershey has been growing over the past years and recorded a solid showing to finish 2020. In Q4 2020, Hershey’s net sales improved by 5.7 %, amounting to $2.185 billion. 

Divestitures influence was a 0.4 points headwind for foreign exchange and 0.2 points for net sales. As a result, net income rose by 41.8%, $1.39 per share-diluted or a $291.4 million net income. 

Hershey also recorded a full year’s financial results summing to $8,149.7 million in net sales, a 2% increase. However, the divestitures and acquisition influence was a 0.5 points headwind for net sales and foreign currency exchange.  

The net income recorded was $1,278.7 million or $6.11 per share-diluted earnings per share, an 11.9% increase. The adjusted incomes were $6.29 per share-diluted, marking an 8.8% rise. 

Hershey’s marketing, selling, and administration expenses rose by 4% in the 2020s fourth quarter, boosted by their enhanced advertising in the North American sector. During their fourth quarter last year, Hershey recorded a $405.1 million or 41.6% operating profit, a massive increase from 2019, while raising the operating margin basis points by 470 points.

A company’s operating margin can tell you if it has problems because the margin usually declines before the revenue and profit. Operating margin is calculated by dividing a company’s operating income by its revenue. For example, for the last three months in December 2020, Hershey’s revenue and operating income were $2,185 million and $424 million, respectively.

Hence, their operating margin was at that time was 19.41%, which isn’t a bad sign. This income has been progressively growing. Over the past decade, Hershey’s operating margin is between 17.18% and 22.21% and ranked with a percentage margin that exceeds about 93% of all the Consumer Packaged Goods companies. 

The average percentage growth rate as per operating margin is 4.30%. According to finbox, over fiscal years 2016 to 2020, Hershey has recorded a gross profit margin of 45.3% to 45.4%.

Hershey Dividend Payout Ratios

Companies usually pay out dividends from the profits it earns. However, a dividend may become unideal and unjustifiable if the company pays out more than it makes. Therefore, it’s best to be stringent and careful when selecting a dividend growth company. Payout ratios can be calculated using earnings, net income, or free cash flow, as outlined here.

You can determine if the company can afford its dividends by analyzing its net income percentage after tax. For example, Hershey paid more than half of its profits at about 51% as dividends over the trailing 12-month period. Payout ratios of more than 50% usually indicate that the company is almost reaching maturity. However, this does not mean they cannot continue to increase their dividend.

Besides comparing Hershey’s dividends against its profit, it’s also essential to know if the company can generate enough money to pay dividends. The free cash flow payout ratio is around 51% which is slightly lower than the 58% trailing ten-year average.

Usually, Hershey’s dividends are covered by cash flow and profits, implying that their dividends are ideal and sustainable. Furthermore, with a low payout ratio, Hershey has a significant safety margin to prevent cutting its dividend. 

Hershey Dividend Stock – Growth of Dividends and Earnings

With a robust growth prospect, it’s easy for a business to provide the best dividend payment. Dividends tend to grow smoothly and immensely if a company’s earnings per share snowball. A company with decreasing earnings per share usually ends up cutting or suspending its dividends

Therefore, an investment in Hershey for its dividend doesn’t seem like a lousy prospect due to its skyrocketing earnings. For the last five years, Hershey has been recording earnings per share GAGR of more than 21%. 

The company’s rational payout ratio, earnings growth, and profits reinvestment indicate that the Hershey dividends have a higher incremental growth probably due to the strong prospects. 

Sometimes, relying on dividends as an income source can be risky, especially when the company starts struggling financially and decides to cut its dividends. Such an occurrence will not only impact your income flow, but it will also cause your investment decline.

Dividend volatility describes the measure of a dividend’s risk. This Hershey dividend stock review will analyze its dividend payment for the last ten years to help have a deeper look at its dividend volatility.  

Statistics show that Hershey’s dividends have been stable in the last decade, which a great sign. This data indicates that Hershey’s dividends and the company, in general, have a high resilience.

Compared to its first annual payment in 2011 of $1.38 with that of last year, $3.15, Hershey’s dividends have shown significant growth, approximated to be 9.7% annually over the past decade. Hershey has grown the dividend for 12 consecutive years making the company a Dividend Contender.

In the past five years, Hershey had attained an average dividend growth rate of about 7% annually. As a result, Hershey has constantly increased its dividends and earnings growth over the years. 

Growing earnings faster than dividends is a positive sign for dividend growth investors and a good sign for sustainability.

Source: Portfolio Insight

Future Growth

While Hershey has performed well in the last decade, it’s often easy to wonder if this will be the trend in the upcoming years. Hershey provided a 2021 outlook considering the extraordinarily high volatility associated with the ongoing pandemic. 

The Hershey board of management expects a 6% to 8% EPS growth rate and 2% to 4% net sales growth. In addition, the increased sales of seasonal chocolate and take-home and marketplace share profits in the North America segment are expected to contribute to the segment’s performance and momentum in the first half of 2021. 

The company expects consistent trends in sales in the International and Other segment markets, although the recovery magnitude and pace aren’t sure yet.

Hershey expects growth in the sales and expansion of the modest gross margin to help it make reinvestments while improving its earnings per share.

It also expects an approximately $130 million interest expense and a $550 million capital expenditure, driven by its significant initiatives like supply chain and the current ERP transformation. 

Debt Analysis

From Hershey’s earnings release on April 29, 2021, the company had an overall debt of $4.513 billion, with long-term debt of $4.094 billion. Short-term and current debt were $418.43 million, and cash and cash equivalents were $1.132 billion. Thus, the company’s net debt was a sum of $3.38 billion. 

Here’s a brief definition of some of the terms used in the above paragraph: current debt refers to a part of an industry’s long-term debt that’s due in a year, and long-term debts are due in more than a year. Cash and cash equivalent refers to the money and all liquid securities with three months or less maturity period. Total debt refers to the (long term + current debt + short-term debt) – cash equivalents. 

A company’s financial leverage can be estimated by comparing the debt ratio. For example, Hershey’s total assets are worth $9.26 billion and a debt ratio of 0.53. Debt ratios above one usually mean that most of the debt is financed by assets, which can be risky.

The defaulting loan risk usually increases with the debt ratio if the interest rises too. Currently, Hershey has a debt-to-equity ratio of 215%, which is a little high. However, the company has an interest coverage ratio of over 11X and a NET DEBT/EBITDA or leverage ratio of 1.56X justifies Moody’s investment-grade A1 rating.

Conclusion on Hershey – Dividend Stock Review

As a dividend growth Investor, there s a lot to like about Hershy. Solid and reliable earnings have paved the way for free cash flow and dividend growth. As a dividend achiever, the company has returned increasing dividends to shareholders for the past 12 years. Unfortunately, share buybacks were canceled during the COVID-19 pandemic, but we can expect them to resume in the coming months.

The snacking business will most likely remain a focus. However, investment in innovation should drive sales higher over the long haul. However, we have seen trends that consumers are becoming more health-conscious, which could damage the companies’ expected growth rates in the future. In addition, the balance sheet is in reasonably good order and leaves plenty of room for the company to grow through bolt-on acquisitions.

For Investors purely focused on income and dividend safety, Hershey is a stock that ticks many boxes, but valuation becomes essential from a total return point of view. As a result, investors may be disappointed to hear that the current dividend yield of 1.91% is lower than the companies historical 2.17% average. In addition, during the past ten years, shares of Hershey have traded with an average P/E ratio of about 22 times earnings. However, the current P/E ratio of 24 suggests the company might be slightly overvalued, limiting future upside from stock price appreciation.

That said, the company trades at a premium price for a reason. During the last financial crisis, the company managed to increase its profits and sales. Fortunately, we have seen this trend happen again during 2020.