For investors looking for a safe dividend investment, perusing the list of Dividend Kings is a good place to start. These companies have all paid and increased dividends for 50 years or more. This doesn't mean that the streaks will continue forever. Indeed, companies frequently drop off the list. But it does show which companies have a history for operational excellence and prioritize shareholder returns.
Three companies that make the Dividend Kings list are beverage giant The Coca-Cola Company(NYSE: KO), Coke's top rival PepsiCo(NASDAQ: PEP), and food company Hormel Foods(NYSE: HRL). But from an investment perspective, these three companies share even more similarities than just their dividend longevity.
For starters, dividend investors like to consider a stock's dividend yield before investing -- this is how much investors have received for the value of their investment in the past year. The chart below shows that Coca-Cola, Pepsi, and Hormel all have a dividend yield close to 3%, giving investors $3 for every $100 invested.
Additionally, dividend investors like to consider a company's payout ratio to assess the riskiness of the investment. This measures the percentage of a company's earnings that go toward the dividend. Generally speaking, lower is better. But Coca-Cola, Pepsi, and Hormel have similar payout ratios at 74%, 74%, and 76% respectively.
Therefore, there's no clear winner between Coca-Cola, Pepsi, and Hormel when looking at their consecutive years of paying a dividend, their dividend yields, and their payout ratios. These factors being equal, I believe there's another factor to consider. And it makes Hormel the best option for investors looking to buy one of these three stocks today.
Why I'm picking Hormel stock
Over the next several years, I believe Hormel can grow its profits at a better pace than Coca-Cola and Pepsi. And that's why I like it best.
Consumers are well aware of Hormel's Chili and Spam. But most are probably unaware of just how many products and brands this company has. And with this portfolio of products, Hormel is on a mission to dominate convenience stores.
Hormel has long had a presence in convenience stores but a lot of it is under the radar. For example, investors might not know that it's a top company for pizza toppings and many convenience stores sell hot pizza using Hormel ingredients.
Moreover, Hormel sells snacks under its Skippy peanut butter brand, refrigerated snack trays, as well as microwavable meals with its Compleats brand.
Hormel had a convenience store presence already but acquired Planters in 2021. Planters is a more pure-play snacking brand and had a broader presence in convenience stores. Now the company can leverage the distribution of the Planters brand to expand the distribution of its other Hormel products.
Compared to sales at grocery stores, Hormel's profit margins are better in convenience stores and with its food-service products. Therefore, growth in this area could lead to better profitability. And profit growth leads to more room to service and grow its dividend.
Pepsi stock is a close second
Of course, there is a caveat to my upbeat expectations for Hormel: I'm counting on something to start happening within the next few years that's not going to happen this year. Hormel already reported financial results for its fiscal first quarter of 2024 and it gave full-year adjusted diluted earnings per share (EPS) guidance of $1.51 to $1.65.
For perspective, Hormel had adjusted diluted EPS of $1.61 in its fiscal 2023. Therefore, its guidance implies a potential drop in earnings. I'm counting on the growth in convenience-store channels to eventually start having a positive impact beyond fiscal 2024.
This uncertainty for Hormel is why Pepsi stock is a close second for a stock to buy today. Pepsi also has a strong path to earnings growth and it's a somewhat simpler proposition.
Pepsi is looking to its international business for profit growth more than ever. Revenue for its international operations was up 6% year over year in 2023. However, this led to a more than 200% increase in its international operating profit. And its international operating profit made up 38% of its total operating profit.
When discussing profitability for international operations, Pepsi CEO Ramon Laguarta said, "Our international business is very scaled now." And this scale points to further profit growth for the company as international sales grow. And Laguarta further said that the company expects international growth to outpace growth in North America again in 2024.
Therefore, Pepsi has a simple path to earnings growth, giving the stock upside potential as well. This is something for investors to keep in mind, even though I still believe Hormel's potential for the next several years could be higher.
Should you invest $1,000 in Hormel Foods right now?
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Jon Quast has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
