Hormel (HRL) is a huge food company today, but it started from humble beginnings. In 1891, George A. Hormel established the Geo. A. Hormel & Co. in Austin, Minnesota.

The company realized rapid growth, as consumers took a liking to fresh pork products. By 1910, the company was already planning nationwide and international expansion.

In 1926, Geo. A. Hormel & Co. developed the world’s first canned ham.

The company just kept on growing, and today Hormel generates more than $9 billion of annual sales.

Hormel possesses an amazing dividend history. The company has paid more than 350 quarterly dividends without interruption. That streak goes back to its initial public offering in 1928.

Hormel is also a great dividend growth stock. It has raised dividends for 50 years in a row. Hormel is a Dividend Aristocrat. You can see the entire list of Dividend Aristocrats here.

Keep reading this article to learn more about the investment prospects of Hormel.

Business Overview

Hormel’s business is structured in five different operating segments:

• Refrigerated Foods (50% of sales)
• Jennie-O Turkey (18% of sales)
• Grocery Products (17% of sales)
• Specialty Foods (9% of sales)
• International & Other (6% of sales)

Hormel has many easily recognizable brands. It has a diversified portfolio across product categories, including both shelf-stable and refrigerated products.

Source: Company website

The strength of Hormel’s business model is evident by its historical growth. The company has managed to continue growing through all sorts of challenges over time.

Source: Barclays 2016 Consumer Staples Conference, page 12

Hormel’s business strength lies in its ability to envision and adapt to changing consumer tastes. Hormel saw explosive growth in the early years of the 20thcentury because of the boom in pork consumption.

Today, Hormel is capitalizing on the boom in turkey consumption. U.S. consumers are eating more turkey and less red meat, as the modern consumer is very health-conscious.

Source: Barclays 2016 Consumer Staples Conference, page 18

This is why the Jennie-O acquisition is a prime example of Hormel management’s strong leadership. Hormel acquired Jennie-O in 2001, for $334 million.

The Jennie-O operating segment posted 20% sales growth last quarter. Last year, Jennie-O brought in $276 million of profit. The acquisition has paid for itself, and then some.

Growth Prospects

Hormel has a long track record of generating growth through internal investment and acquisitions. These strategies are working well to start 2016.

Source: Barclays 2016 Consumer Staples Conference, page 6

Going forward, these same strategies should continue to fuel future growth. And, this will continue to allow the company to reward shareholders with share repurchases and dividend growth for many years to come.

A key growth catalyst for Hormel will be in new product categories. In the past few years, Hormel has expanded aggressively into the health and wellness trends. It has done this through acquisitions.

In 2014, Hormel acquired CytoSport Holdings for $450 million. CytoSport is the maker of MuscleMilk protein products.

In 2015, Hormel acquired Applegate Farms for $775 million Applegate produces natural and organic prepared meats, such as deli meat, bacon, and hot dogs. It is the number one brand in natural and organic meats.

Last quarter, the Applegate business helped generate 24% segment profit growth for the Refrigerated Foods division.

The goal of this investment is to appeal to a new type of consumer such as Millenials. These consumers tend to be highly concerned with proper eating habits. As a result, Hormel is targeting this consumer with natural and organic products, as well as nutritional products.

To market these products more effectively, Hormel is planning a major ramp in advertising spend. Last year, Hormel’s advertising expense increased by $31 million. It is planning another similar double-digit increase in 2016.

Competitive Advantages & Recession Performance

Hormel’s biggest competitive advantage is its brand portfolio. The company has several brands that command leadership positions in their respective categories.

One of the best aspects of Hormel’s business model is its stability. As a food producer, there will always be a certain level of demand for Hormel’s products. This is true even when the economy goes into recession.

Hormel’s earnings-per-share through this period are shown below:

• 2007 earnings-per-share of $1.07
• 2008 earnings-per-share of $1.04 (2.8% decline)
• 2009 earnings-per-share of $1.27 (new high)

Hormel has increased its earnings-per-share in 27 out of the last 30 years. The reason for this is that many of the company’s brands are recession-resistant. For example, Spam is a product that people tend to consumer more when the economy is struggling.

This is a competitive advantage for Hormel because its competitors that operate on the high end of the pricing spectrum will suffer more greatly during recessions.

Another competitive advantage is Hormel’s scale. The company has the financial resources to pursue large acquisitions. It can then easily incorporate its acquired companies into its existing distribution infrastructure.

That allows Hormel to produce significant cost synergies from its acquisitions, which helps grow earnings-per-share.

Valuation & Expected Total Return

Hormel stock trades for a price-to-earnings ratio of 23. This is slightly below the S&P 500 average price-to-earnings ratio, which is 25.

However, Hormel stock is valued significantly above its own average. Since 2000, the stock has held an average price-to-earnings ratio of 18.

It appears investors have bid up Hormel’s valuation, in part to its strong dividends. Dividend stocks have become more attractive during the prolonged period of low interest rates.

Hormel stock is fairly valued. Therefore, future shareholder returns will be comprised of earnings-per-share growth and dividends. A breakdown of expected returns is as follows:

• 4%-6% organic revenue growth
• 2% revenue growth from acquisitions
• 1% margin improvements
• 1% share repurchases
• 2% dividend

Over the next several years, Hormel stock could produce 10%-12% annualized returns.

Final Thoughts

Hormel is a legend among dividend stocks. It has raised its dividend each year for five decades. The company’s long dividend streak makes it one of only 18 Dividend Kings – dividend stocks with 50+ years of consecutive dividend increases.

It has done this by operating in a stable industry. And it has a proven track record of growth through new products and acquisitions.

Dividend growth investors can view Hormel as a strong dividend stock to hold over the long term.The company currently ranks in the Top 30 out of over 180 stocks with 25+ years of steady or rising dividends using The 8 Rules of Dividend Investing.