Hormel Foods (NYSE:HRL) Is Increasing Its Dividend To $0.2825

Hormel Foods Corporation (NYSE:HRL) has announced that it will be increasing its dividend from last year's comparable payment on the 15th of February to $0.2825. Based on this payment, the dividend yield for the company will be 3.5%, which is fairly typical for the industry.

View our latest analysis for Hormel Foods

Hormel Foods' Dividend Is Well Covered By Earnings

We like to see a healthy dividend yield, but that is only helpful to us if the payment can continue. Prior to this announcement, Hormel Foods was paying out 76% of earnings and more than 75% of free cash flows. This indicates that the company is more focused on returning cash to shareholders than growing the business, but we don't think that there are necessarily signs that the dividend might be unsustainable.

Over the next year, EPS is forecast to expand by 28.0%. If the dividend continues along recent trends, we estimate the payout ratio will be 66%, which would make us comfortable with the sustainability of the dividend, despite the levels currently being quite high.

Hormel Foods Has A Solid Track Record

The company has an extended history of paying stable dividends. Since 2013, the annual payment back then was $0.34, compared to the most recent full-year payment of $1.13. This implies that the company grew its distributions at a yearly rate of about 13% over that duration. It is good to see that there has been strong dividend growth, and that there haven't been any cuts for a long time.

Dividend Growth Is Doubtful

The company's investors will be pleased to have been receiving dividend income for some time. Unfortunately things aren't as good as they seem. In the last five years, Hormel Foods' earnings per share has shrunk at approximately 5.3% per annum. Declining earnings will inevitably lead to the company paying a lower dividend in line with lower profits. Earnings are forecast to grow over the next 12 months and if that happens we could still be a little bit cautious until it becomes a pattern.

Our Thoughts On Hormel Foods' Dividend

In summary, while it's always good to see the dividend being raised, we don't think Hormel Foods' payments are rock solid. In the past the payments have been stable, but we think the company is paying out too much for this to continue for the long term. We don't think Hormel Foods is a great stock to add to your portfolio if income is your focus.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. However, there are other things to consider for investors when analysing stock performance. Given that earnings are not growing, the dividend does not look nearly so attractive. Very few businesses see earnings consistently shrink year after year in perpetuity though, and so it might be worth seeing what the 8 analysts we track are forecasting for the future. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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