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One of the biggest dividend stocks has fallen 45% and is now trading at a once-in-a-decade valuation. Is it finally a purchase again?

When a company pays dividends, it is a good thing for shareholders. If a company consistently pays a dividend every quarter, that’s even better. And if a company can increase its dividend year after year because its profits are rising, that’s a Awesome thing.

If a dividend increase is a good thing, then so be it Hormel food (NYSE: HRL) is one of the best dividend stocks out there. On February 15, the company paid a dividend for the 382nd quarter in a row. Additionally, this dividend was a 3% increase over the previous dividend, marking the 58th consecutive year that Hormel has increased its payout.

Hormel has increased its dividend for more than 50 consecutive years and is one of the relatively few Dividend Kings.

Despite its history of greatness for dividend investors, Hormel’s shares are in the doldrums, having fallen about 45% from their peak. The graph below goes back about 50 years. And it clearly shows that this is the worst pullback for Hormel stock in fifty years.

Therefore, this is an unprecedented pullback for Hormel stock. But the price drop is not only unprecedented, but also to an unusually cheap valuation.

When investors compare a company’s market valuation to its earnings, it is called a price-to-earnings (P/E) ratio. Hormel has a price-to-earnings ratio of almost 21. That’s significantly cheaper than the 10-year average and within the range of a once-in-a-decade bargain valuation.

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Here’s what else investors need to know

I’ve found that Hormel stock’s decline is unprecedented and its valuation is unusually cheap. That’s why this is a good time to invest. But allow me to explain why I believe Hormel stock is poised to grow its earnings for years to come, which reinforces my belief that it is a solid addition to a stock portfolio today.

When consumers think of Hormel, many equate it with Spam products. But the company also sells many other consumer food products in various categories. Furthermore, many investors might think that Hormel only sells packaged foods in grocery stores. But it also supplies products to food service companies, and that’s a big profit opportunity for Hormel.

Hormel’s fiscal 2023 ended on October 29, 2023. In fiscal 2023, more than half of the company’s profits came from its foodservice division. This division sells meats and pizza toppings to food service companies, often convenience stores. This part of the company also sells snacks in convenience stores. And that is important because it is linked to future growth.

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It’s reasonable to expect tepid grocery store growth from Hormel’s more mature brands, such as Spam. However, the company acquired the Planters brand in 2021. And Planters has a larger presence in convenience stores than Hormel on its own.

Hormel now has the opportunity to expand its foodservice product offerings in convenience stores over time because it already has a foot in the door with Planters. This is something that management highlighted during its 2023 investor day presentation.

It is fair to say that the growth in convenience store channels in 2023 did not yield the desired results for Hormel: the sales volume of food service (of which convenience stores are a part) only remained stable. However, Hormel has an illustrious long-term success record. That’s why I wouldn’t bet on it ultimately finding the growth it expects in convenience stores.

In summary, Hormel expects growth in convenience store channels in the coming years, which will be a higher-margin revenue source for the company. This should lead to respectable long-term earnings growth, which could drive the stock price higher over time. As an added bonus, the stock is trading at an attractive valuation, making now one of the best times to buy Hormel stock in a long time.

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Should You Invest $1,000 in Hormel Foods Now?

Before you buy stock in Hormel Foods, consider the following:

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Jon Goyle has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has one disclosure policy.

One of the biggest dividend stocks has fallen 45% and is now trading at a once-in-a-decade valuation. Is it finally a purchase again? was originally published by The Motley Fool

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