The Hershey Company (HSY) is one of the great examples of determination in the history of American business.

Hershey’s founder, Milton S. Hershey, spent his teenage years as an apprentice to a candy maker. Before long, he opened two candy stores—which both eventually went bust.

Milton Hershey went bankrupt twice before the age of 30. But he stuck with his craft, and his resilience paid off.

Hershey transformed the chocolate industry. Previously, chocolate was a luxury reserved for the wealthy. But thanks to his unique milk chocolate recipe, it became something everyone could afford.

Today, Hershey generates over $7 billion in annual sales.

Hershey has a tasty dividend yield of 2.5%, and is a Dividend Achiever in the making. It has raised its dividend each year since 2010. With only a few more, it will join the Dividend Achievers – stocks with 10+ consecutive years of dividend increases.

You can see the entire list of all 273 Dividend Achievers here.

Hershey has paid 348 consecutive quarterly dividends. Going forward, it can continue to grow its dividend each year. The only downside for the stock is that it has a valuation that is not very appetizing.

Business Overview

Hershey is a chocolate manufacturer. It employs approximately 21,000 people. Hershey has a very large product portfolio, with more than 80 brands.

The company operates in two main segments, which are based on geographic markets:

• North America (88% of sales)
• International & Other (12% of sales)

The North America segment includes the U.S. and Canada. The International & Other segment is comprised of various nations in Asia, Latin America, Africa, Europe, and the Middle East.

2015 was a challenging year for Hershey. Sales declined by 0.5%.

Source: 2015 Annual Report, page 52

Hershey did not perform up to its own expectations heading into the year. Management had forecast 5.5%-7.5% sales growth.

The silver lining for last year could be that much of the damage was due to unfavorable currency fluctuations. The strong U.S. dollar is negatively impacting Hershey’s international operations.

This has weighed on Hershey for a prolonged period. Over the past three years, the stock has underperformed its peer group and the S&P 500 Index.

Source: 2015 Annual Report, page 52

Fortunately, Hershey continues to grow earnings-per-share. The bottom line is benefiting from cost controls and increased efficiencies. In addition, Hershey has made some significant acquisitions which are helping drive growth.

Growth Prospects

Conditions have improved slightly this year. Sales are flat over the first nine months of 2016. Management expects sales to increase 1% for the full year.

Hershey’s two most compelling growth opportunities moving forward are new products, and expansion in new markets.

Hershey is expanding outside its core chocolate focus, primarily through acquisition. For example, Hershey acquired beef jerky manufacturer Krave last year for $218 million.

This acquisition marked a notable shift in strategy. The company is moving into new categories, as chocolate consumption has stagnated in the U.S. due to more health-conscious consumers.

It also acquired Brookside, to boost its presence in the premium chocolate category.

Overall, acquisitions boosted Hershey’s total sales by 0.7% last quarter.

Competitive Advantages & Recession Performance

Hershey’s main competitive advantage is its brand power. Most consumers immediately associate Hershey with chocolate. It has an entrenched brand image, due in large part to its advertising.

The company spends significant financial resources on advertising:

• 2013 advertising expense of $582 million
• 2014 advertising expense of $570 million
• 2015 advertising expense of $561 million

Another competitive advantage for Hershey is economies of scale. Hershey is the giant in the chocolate industry. It has a $21 billion market cap and a global presence.

Hershey’s scale allows it to cut costs when deemed necessary. Supply chain productivity and volume declines reduced cost of sales by approximately 6.6% in 2015. As a result, the company is highly profitable. Adjusted gross margin was 45.6% in the third quarter of 2016.

And, Hershey commands pricing power. Pricing added 0.7% to revenue growth last quarter.

One of the benefits of buying Hershey stock is its stable business model. Chocolate enjoys a certain level of demand, even if the economy goes into recession. One could argue that chocolate’s resiliency is because it is viewed as comfort food, which consumers may flock to when times are tough.

Hershey’s performance during the Great Recession, and subsequent recovery, is as follows:

• 2007 earnings-per-share of $2.08
• 2008 earnings-per-share of $1.88 (10% decline)
• 2009 earnings-per-share of $2.17 (15% increase)
• 2010 earnings-per-share of $2.55 (18% increase)

Hershey performed quite impressively during the Great Recession of 2007-2009. It grew earnings overall in this period.  The company is an example of a recession-proof stock.

And, its recovery coming out of the recession was equally impressive.

Valuation & Expected Total Return

Hershey shares trade for a price-to-earnings ratio of 26. This is slightly higher than the S&P 500 Index, which has an average price-to-earnings ratio of 25.

The stock also trades above its own average. Since 2000, Hershey stock held an average price-to-earnings ratio of 23.

It seems investors are willing to pay a premium for Hershey stock because of its high-quality business. There is an old saying in value investing, that a premium company deserves a premium valuation.

Indeed, Hershey is highly stable and has an above-average dividend yield. But investors may not benefit from further multiple expansion, due to Hershey’s stalled sales growth.

As a result, future returns will be comprised of earnings-per-share growth and dividends. A breakdown of potential earnings growth could be as follows:

• 4%-6% organic sales growth
• 1% revenue growth from acquisitions
• 1% earnings growth from cost cuts

When adding in the 2.5% dividend yield, expected returns could reach approximately 8.5%-10.5% per year.

Future returns would be even better if the stock were priced attractively. Dividend stocks like Hershey have become much more popular in recent years, owing to the low interest rate environment.

Final Thoughts

Hershey has a long history and an amazing track record of paying consistent dividends. Earlier this year, the company lifted the dividend by 6%.

One potential downside to the stock is valuation. Investors looking for value may want to wait for a better buying opportunity.

That being said, Hershey is a high-quality business that can satisfy an investor’s hunger for income.