One of my favorite combinations when looking for passive income in the stock market is finding companies with safe, stable operations and dividend yields near 10-year highs. Although finding this combination isn’t exactly common, chocolatier The Hershey Company (NYSE:HSY) and fast food franchisor MTY Food Group (OTC: MTYF.F) currently meet these requirements.
With Hershey and MTY down 12% and 20% from their 52-week highs – and 33% and 39% below their all-time highs – investors would be wise to consider these two great dividend stocks at discounted prices.
This is why buying Hershey and MTY makes for an attractive investment proposition, with their dividend yields of 2.9% and 2.3% nearing a decade high.
Hershey: Safety and stability in chocolates and snacks
Perhaps the most compelling reason to consider buying The Hershey Company is its stability. Hershey operates in the recession-proof industries of chocolate and sweet and salty snacks and is undeniably stable, as evidenced by its five-year beta of 0.37.
Beta measures a stock’s volatility compared to the broader market, and a beta lower than 1 means a stock is less likely to plummet during bear markets. Stocks with a beta as low as Hershey’s are what I would consider “fundamental” investments that you can use as a fundamental part of all your portfolios. That is why it is one of the nine core positions in my daughter’s portfolio.
That said, the current 33% drop from all-time highs is the third largest in the past thirty years, only smaller than the 50% and 40% drops during the 2008 and 2000 crashes.
Does this decline show that Hershey is damaged goods, as the broader market is still on the rise?
Not so much. First, before this decline, the ratio of enterprise value (EV) to earnings before interest, taxes, depreciation, and amortization (EBITDA) was at an all-time high of 24. For perspective, Hershey’s current EV/EBITDA ratio is 15, and its historical average as a publicly traded stock is 18, showing how high its valuation had become.
Additionally, the company faces near-term headwinds ranging from the implementation of a new corporate resource planning system, a brief quadrupling of cocoa prices in less than two years, and a price-conscious consumer. But when investors look back on these challenges ten years from now, I am confident that they will ultimately prove temporary and that Hershey’s market-leading brands will have endured.
Anchored by the three most recognizable chocolate brands in the United States, according to Statista (Hershey, Kit Kat and Reese’s), the company remains the leader in its niche. In addition to being the best banana in the chocolate world, Hershey’s recent acquisitions of Skinny Pop Popcorn and Dot’s Homestyle Pretzels are paying off immediately, with sales of the new units growing 13% and 65% annually since 2019.
And speaking of dividends, despite Hershey’s challenges since early 2023, the company has increased its dividend payments twice in three quarters, boosting its payout by a whopping 32%. Even after this massive increase, the dividend uses only 55% of Hershey’s net income, leaving plenty of wiggle room to continue raising a dividend that is already at a decade-high.
Make no mistake: Hershey won’t be a multibagger anytime soon. However, its 2.9% yield, leadership position, success with recent acquisitions, and steady results in the face of a host of short-term issues make it a great foundation to buy and hold for decades.
MTY Food Group’s diversification through all seasons and varieties
While Hershey’s safety comes from its focus on the resilient chocolate and snacking niche, MTY Food Group’s stability comes from its broad diversification. MTY’s portfolio of approximately 90 fast food brands is incredibly well diversified across all four seasons and almost every cuisine imaginable.
A dramatic oversimplification of its well-rounded portfolio, MTY’s litany of frozen treats and smoothies brands leads the way in summer, while labels like Wetzel’s Pretzels and Papa Murphy’s do more of the heavy lifting in the colder months.
In addition to this diversification, MTY’s franchisor focus – with all but 200 of its approximately 7,000 locations operated by franchisees – makes it a uniquely safe investment proposition. MTY transfers the majority of risk and capital requirements to its franchisees and is an asset-light operator with stable free cash flow (FCF) margins.
Even in the midst of the pandemic, MTY maintained an FCF margin of 20%, which is actually higher than the current 15%. While lower consumer confidence continues to weigh somewhat on the company’s FCF margins, MTY’s FCF growth over the past decade borders on artifice.
MTY has made 27 acquisitions worth more than $1.7 billion in the past decade and has been masterful at redeploying rising FCF totals into new ventures that create even more – a beautiful flywheel effect in motion.
However, MTY does not spend all of its free cash flow on mergers and acquisitions. Currently, the company’s dividend yield is at a decade-high of 2.3%, barring the 2020 crash. What makes this yield even more exciting is that it uses just 14% of MTY’s free cash flow, meaning the company could triple its returns to 7% and still have cash left over.
But with the stock trading at an EV/FCF ratio of just 10, management has decided to buy back shares at a deep discount to the market. With management showing a willingness to buy back shares after the sell-off of the past five years, MTY’s current 39% decline from its all-time high should see the company buying back shares by hand.
Since 2019, MTY has reduced its share count by 1.2% annually – a nice addition to the money paid out to shareholders in dividends.
Taken together, MTY’s steady FCF generation and serially acquisitive ways form a powerful compounding machine that should continue to reward investors with growing dividends for decades to come.
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*Stock Advisor returns October 14, 2024
Josh Kohn-Lindquist holds positions at Hershey and MTY Food Group. The Motley Fool holds positions in and recommends Hershey and MTY Food Group. The Motley Fool has a disclosure policy.
2 Great Dividend Stocks That Are Down 33% and 39% to Buy Now While Their Dividend Yields Are at Nearly Once-in-a-Decade Highs Originally published by The Motley Fool
