Consumer Staples Continue To Shine
Among the best investment choices are consumer staples and Dividend Kings. When those pedigrees intersect, I usually find a stock that’s on the move, or about to be. Today’s news is no different. Hormel (HRL) made headlines with a “mixed” report that has shares under pressure in early action. By my assessment, this stock is not only a great buy, but today’s weakness is offering a new opportunity to get into this Dividend King before it sets another new all-time high.
The Q2 Results Are Mixed, So What?
The Q2 results are mixed but I say so what? Top-line revenue beat by 3.4%, is supported by positive internals, and adjusted EPS only fell short by a penny. What the headlines fail to mention is that revenue accelerated from the previous quarter and the outlook for the rest of the year is positive. The headlines also fail to mention that the 2nd quarter revenue results are the best the company has ever had.
"We continue to excel and gain market share in channels that are open and available to us, namely the retail channel. We know consumers are looking for trusted brands, and we will continue investing in our leading brands such as SPAM®, SKIPPY®, Jennie-O®, Hormel® Natural Choice®, and Applegate®,” says CEO Jim Snee.”
Internally, net volume was up 4% for the year, offset by a 120 basis point decline in margins. The margin decline is largely due to the company’s efforts to absorb costs and reward employees during the crisis. The company is expecting to incur similar costs in the following quarter but says most are temporary in nature.
“In the second quarter, the company absorbed approximately $20 million in incremental supply chain costs primarily related to lower production volumes, employee bonuses, and enhanced safety measures in its production facilities. The company expects to absorb another $60-$80 million in the second half of the year, weighted primarily to the third quarter. The majority of the increased costs are expected to be temporary.”
On a segment basis, the company saw growth in all metrics save one, refrigerated items, and that largely due to a shift in demand. Organic sales were up 7% across the business with notable strength in grocery (+8%), Jennie-O (+12%, and U.S. gross-retail (+16%). International is lagging at up 2.0% but the International markets were also impacted by harsher lock-down conditions.
The Company Withdraws Guidance, So What?
Hormel also made a splash in the headlines by rescinding the current quarter and full-year guidance. The reason given is COVID-related uncertainty that, based on the Q2 results, is skewed to the upside. If there is any reason for concern, it would be with the dividend and that is about as safe as it can be.
“Our strong balance sheet and stable cash flows give us the confidence to lean into our business and make the right long-term decisions for our team members, suppliers, customers, and shareholders. Even though the COVID-19 pandemic has caused a dramatic shift in consumer behavior, operational disruptions, and extreme volatility in raw material markets, we remain financially strong and well-positioned to weather the pandemic."
Hormel declared the latest divided earlier this week and is on track to increase the payout for the 54th consecutive year in the October 2020 quarter. The payout ratio is a cool 53% and supported by an outlook for growth, both this year and next, that in turn supports the outlook for aggressive distribution increases. The five-year CAGR is running near 16% or 0.3% of today’s share prices. The yield is currently running near 1.95%.
The Technical Outlook: Bullish, But...
The technical outlook is bullish but there is a caveat. While the stock has performed exceptionally well since the correction, price action has been a little sluggish since. Today’s news has shares trading lower and below the short-term moving average where near-term resistance could build. The indicators confirm the move and suggest a deeper sell-off may be coming. If so, the next target for support is near $46 where I expect buyers to step in. If price action breaks below $46 a move to $44 or lower may be in the offing. If that happens Hormel will become a screaming buy.
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