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Hormel Foods Corporation (NYSE:HRL) has announced that it will be increasing its dividend from last year's comparable payment on the 15th of May to $0.275. This makes the dividend yield about the same as the industry average at 2.8%.
Check out our latest analysis for Hormel Foods
Hormel Foods' Earnings Easily Cover The Distributions
While it is always good to see a solid dividend yield, we should also consider whether the payment is feasible. Hormel Foods was earning enough to cover the previous dividend, but it was paying out quite a large proportion of its free cash flows. The business is earning enough to make the dividend feasible, but the cash payout ratio of 87% indicates it is more focused on returning cash to shareholders than growing the business.
Over the next year, EPS is forecast to expand by 21.3%. If the dividend continues on this path, the payout ratio could be 54% by next year, which we think can be pretty sustainable going forward.
Hormel Foods Has A Solid Track Record
Even over a long history of paying dividends, the company's distributions have been remarkably stable. The dividend has gone from an annual total of $0.30 in 2013 to the most recent total annual payment of $1.10. This works out to be a compound annual growth rate (CAGR) of approximately 14% a year over that time. It is good to see that there has been strong dividend growth, and that there haven't been any cuts for a long time.
The Dividend's Growth Prospects Are Limited
The company's investors will be pleased to have been receiving dividend income for some time. However, Hormel Foods' EPS was effectively flat over the past five years, which could stop the company from paying more every year. Growth of 0.7% per annum is not particularly high, which might explain why the company is paying out a higher proportion of earnings. While this isn't necessarily a negative, it definitely signals that dividend growth could be constrained in the future unless earnings start to pick up again.
In Summary
In summary, while it's always good to see the dividend being raised, we don't think Hormel Foods' payments are rock solid. The low payout ratio is a redeeming feature, but generally we are not too happy with the payments Hormel Foods has been making. We would be a touch cautious of relying on this stock primarily for the dividend income.
Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. However, there are other things to consider for investors when analysing stock performance. For instance, we've picked out 1 warning sign for Hormel Foods that investors should take into consideration. Is Hormel Foods not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.