I initially bought Hershey(NYSE: HSY) in late 2023 and over roughly a year built it up to what I consider a full position. The story behind the stock hasn't changed at all since I bought it, and if I didn't already have a full position, it would still be on my top-buy list. Here's why I have such a taste for Hershey today.
What does Hershey do?
If you are going to buy and hold Hershey stock, you have to get on board with one important fact: The food company's main business is confections.
From its namesake brand to Reese's peanut butter cups, this company is all about snacking. Even its efforts to diversify into pretzels and popcorn are squarely focused on snacks, though of the salty variety. Given the health issues that are top of mind right now for many people, on both the medical and political fronts, this could be seen as a negative.
Image source: Getty Images.
I see it as a positive. It seems highly unlikely to me that the government is going to regulate chocolate out of existence. Too many people like it and, notably, it is an affordable indulgence.
As for the new weight loss drugs that are making headlines, I find it hard to believe, given historical precedence, that people will be any more likely to sustain their use of these drugs than they have been with other drugs over time. According to some estimates, there's about a 50% drop-off rate on compliance with long-term drug use protocols.
All in, I really like Hershey's long-term prospects given its business focus. On top of that, I also like that The Hershey Trust controls most of the voting rights at the company.
This not-for-profit uses the dividends it collects from Hershey to fund its philanthropic efforts. As such, it has a vested interest in making sure Hershey remains a stand-alone company with a steadily growing business and dividend. That's basically what I want, too, so I see The Hershey Trust as an important insider that has interests aligned with mine.
Now is the time to buy Hershey
This leaves one major problem for Hershey: cocoa prices. Cocoa is a commodity, and the supply-demand balance is out of whack right now, resulting in sky-high cocoa prices.
The situation is extreme and thus unusual, historically speaking. But Hershey is used to dealing with commodity volatility. Even if cocoa prices remain elevated, it will just pass the higher costs on to consumers.
Of course, that may take a little while to work through the system. But chocolate isn't really that expensive and is beloved by so many that it seems unlikely that Hershey won't be able to succeed in raising prices.
Given that all of the issues facing Hershey appear likely to be temporary, now seems like a good time to jump aboard. Why? For starters, the dividend hasn't risen every single year it has been paid, but it has trended steadily higher over time.
Meanwhile, the 3.5% dividend yield is near its highest levels over the past several decades. To sum this up, Hershey is a reliable dividend payer that looks historically cheap, using dividend yield as a rough gauge of valuation.
If I'm correct about the headwinds here being temporary, it seems like there's upside to the stock price. And more dividend growth ahead, as well.
To be fair, muddling through this rough patch could take a few years. If you buy the stock, like I have, you'll need to have a strong stomach and patience. That said, the last dividend increase was at the start of 2024 and was an attractive 15%!
The issues the company faced at the start of 2024 are roughly similar to the ones it faces today, so clearly management and the board are confident in the future. And Hershey has again proved it believes in rewarding investors in both good markets and bad.
To be fair, I expect dividend growth to slow down over the next few years because of the impact of inflation in the cocoa market. But a dividend increase that was just a third of the 2024 increase would still be a solid number for a consumer staples company.
Buy when Wall Street is fearful
Hershey shares have fallen more than 40% from their all-time highs in 2023. That's about the same decline as the stock's worst drawdowns since the 1970s. Given the historically high yield and fundamentally attractive business, this is the type of stock that I would buy and hold for the long term.
And that's exactly what I've done. I suggest that dividend investors at least give it a deep dive because, if you do, I suspect you'll want to add this stock to your portfolio, too.
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