Hormel Foods Corp. (NYSE:HRL) Offers a High Yield Backed by Financial Strength

For investors aiming to create a portfolio centered on producing steady passive income, a methodical way to choose dividend-paying stocks is key. One useful technique includes looking for companies that provide an appealing dividend and also show the basic financial soundness to maintain and possibly raise those payments. This method emphasizes quality and durability over seeking the largest available yield, which can sometimes indicate hidden business problems. A real-world use of this technique is to apply a multi-factor filter that finds stocks with good dividend ratings while also needing satisfactory marks for earnings and balance sheet strength. This removes companies that could pay a big dividend but are harming their financial position or future prospects.

HORMEL FOODS CORP (NYSE:HRL), the Minnesota-based global branded food company, appears as a result from such a careful filtering process. The company’s basic financial picture makes a good argument for dividend-oriented investors, especially when examined using the standards from the filter: a good dividend rating backed by sufficient earnings and balance sheet strength.

Dividend Strength and Durability

The main attraction of HRL for an income investor is found in its solid dividend traits, which gave it a high ChartMill Dividend Rating of 8. The company is notable for a few main qualities that fit a cautious dividend investment plan.

• Good Yield: HRL provides a yearly dividend yield of 4.93%, which is much higher than both the S&P 500 average (about 1.87%) and the average for its Food Products industry group (2.41%). This places it in the high end of its sector for current income.
• Dependable History: Steadiness is critical for dividend investors, and HRL performs here. The company has given a dividend for at least ten straight years and has not cut its payment in that time. This record offers some trust in management’s dedication to giving capital to shareholders.
• Dividend Increases: While not fast, HRL has shown a steady, careful way of raising its dividend, with a yearly increase rate of 4.90% over the last five years. This slow rise helps counter inflation over time.

A key point for investors, though, is the present payout ratio. HRL pays about 132% of its past net income as dividends, a figure usually seen as hard to maintain long-term. This high ratio needs notice and shows the value of the other filter standards, earnings and strength, to judge if the company can uphold this payment through other ways, like good cash flow or a short-term earnings drop.

Supporting Basics: Earnings and Strength

The filtering method deliberately considers more than just the dividend, asking for a basic level of earnings and balance sheet strength. These elements are vital because they show if a company has the operational soundness and good finances to keep its dividend during different economic conditions. HRL’s marks in these areas, while not outstanding, give a base of support for its dividend policy.

Earnings Picture (Rating: 5) HRL’s earnings measures show a varied but generally acceptable view. The company is regularly profitable and creates positive cash flow from operations. Its Return on Invested Capital (ROIC) of 5.99% and operating margin of 7.94% are good, doing better than most of its industry peers. However, the report mentions a worrisome pattern of falling margins across gross, operating, and profit levels in recent years. This points to a difficult business setting but also explains why the filter looks for "satisfactory" earnings instead of the best, it accepts that even settled companies encounter pressures while still keeping an ability to pay dividends.

Balance Sheet Strength Evaluation (Rating: 6) The company’s balance sheet strength rating implies a steady financial position, which is an important cushion for dividend durability. Main solvency and liquidity measures are comforting:

• An Altman-Z score of 3.55 shows a small short-term chance of financial trouble.
• A workable Debt/Equity ratio of 0.36 indicates the company does not depend too much on debt.
• Good liquidity is shown by a Current Ratio of 2.47, much higher than the amount required to meet near-term debts.

These strength measures give important background for the high payout ratio. They imply that while the dividend is using most of current profits, the company’s sound finances and liquidity give it the option to keep funding the payment as it tries to better its earnings growth.

Price and Growth Points

From a price view, HRL sells at a P/E ratio near 17.5, which is somewhat less expensive than the wider S&P 500 and about average for its industry. This suggests the market is not assuming too much growth. The growth rating of 3 shows recent difficulties, with Earnings Per Share (EPS) falling over the past year. Still, analysts predict a major recovery, with EPS expected to grow by an average of over 17% each year in the next few years. If this happens, this growth would naturally lower the high payout ratio to a more maintainable figure and could help future dividend raises.

A Full Basic Financial Analysis report for HORMEL FOODS CORP, listing all checked measures, is available here.

Summary

HORMEL FOODS CORP shows the kind of stock a careful dividend filtering plan tries to find. It combines a high, dependable yield with a long history of payments, fulfilling the main income goal. Significantly, it also meets the extra filter needs of satisfactory earnings and balance sheet strength, which are the needed protections that help tell a maintainable dividend apart from a doubtful one. The present high payout ratio is an item to watch, but it is balanced by a sound financial position and positive earnings growth projections. For investors creating an income portfolio, HRL stands as a result that deserves more study based on this quality-oriented filtering method.

For investors wanting to look at other companies that fit similar standards of good dividend quality, acceptable earnings, and balance sheet strength, the set "Best Dividend Stocks" filter offers a changing beginning point for more study.

Disclaimer: This article is for information only and does not make up financial guidance, a suggestion to buy or sell any security, or a support of any investment plan. The examination is built on data and ratings from ChartMill, which looks at past performance and analyst projections. Investors must do their own complete study and think about their personal money situation and risk comfort before making any investment choices. Past results do not guarantee future outcomes.