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Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Hormel Foods Corporation (NYSE:HRL) is about to go ex-dividend in just 4 days. You will need to purchase shares before the 9th of April to receive the dividend, which will be paid on the 15th of May.
Hormel Foods's next dividend payment will be US$0.23 per share, on the back of last year when the company paid a total of US$0.93 to shareholders. Based on the last year's worth of payments, Hormel Foods has a trailing yield of 1.9% on the current stock price of $48.38. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.
See our latest analysis for Hormel Foods
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Hormel Foods paid out a comfortable 47% of its profit last year. A useful secondary check can be to evaluate whether Hormel Foods generated enough free cash flow to afford its dividend. Over the last year it paid out 73% of its free cash flow as dividends, within the usual range for most companies.
It's positive to see that Hormel Foods's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. With that in mind, we're encouraged by the steady growth at Hormel Foods, with earnings per share up 9.9% on average over the last five years. Decent historical earnings per share growth suggests Hormel Foods has been effectively growing value for shareholders. However, it's now paying out more than half its earnings as dividends. If management lifts the payout ratio further, we'd take this as a tacit signal that the company's growth prospects are slowing.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Hormel Foods has delivered an average of 17% per year annual increase in its dividend, based on the past ten years of dividend payments. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.