With ongoing unrest in the capital markets hinting that we won’t be seeing the light at the end of the tunnel anytime soon, I have been writing a lot about companies on which investors can rely for predictable dividends. After all, dividends currently appear to be the only tangible element for investors to project their future returns. With market caps of $45.4 billion and $24.75 billion, General Mills (NYSE: GIS) and Hormel Foods Corporation (NYSE: HRL) are two giants in the space that adequately satisfy the various qualities coming attached to food stocks while offering robust dividend prospects.
Specifically, Hormel Foods has increased its dividends annually for 56 consecutive years. General Mills may have paused dividend growth during some unfavorable market environments, but the company has also never cut its dividend as far back as the available data goes, to 1990.
With investors appreciating their highly-resilient business models over the ongoing uncertainty in the market, they have flocked to their shares for more predictable returns ahead. In fact, while the S&P 500 (SPX) has declined roughly 17.6% over the past year, General Mills and Hormel Goods have gained by 22.6% and 8.5%, respectively, over the same period.
Precisely because their shares have failed to correct in the face of a rising-rates environment, however, I find both stocks modestly overvalued. Accordingly, I am neutral on both stocks.
Why Food Stocks Appear Ideal in the Current Market Environment
Hormel Foods and General Mills have historically performed well during market downturns. This is due to food products being a necessity. People have to eat no matter the underlying market conditions; thus, food costs are the last type of expense consumers will consider moderating.
This makes food stocks like these two particularly attractive during the current highly-inflationary environment, as companies in the space can increase their prices by a factor equal to or even higher than that of inflation without experiencing a fierce decline in their sales.
Which is the Better Dividend Stock?
Overall, I would consider both companies to be solid dividend-growth picks. However, I believe that Hormel Foods has a clear advantage here.
To begin with, with its dividend-growth track record standing at 56 consecutive years, nobody can challenge Hormel’s unwavering commitment to increasingly reward its shareholders. While General Mills has never cut its dividend, it was held steady between 1994 – 1995, 2000 – 2004, and most recently between 2018 – 2020.
As you can see, these are not necessarily recessionary periods but arbitrary ones in which General Mills’ management felt it was better to let profits grow before their next hike. Is this a negative attribute of General Mills? Not at all. Still, when it comes to investors feeling more certain they are going to get their next hike in time, Hormel Foods has the upper hand;
but wait. Does this imply that General Mills has the capacity to grow its dividend by a higher percentage as soon as it reaches a new profitability plateau? In this case, not at all. In fact, Hormel Foods and General Mills feature 10-year dividend-per-share growth compound annual growth rates (CAGRs) of 14.4% and 5.3%, respectively. That’s a massive disparity over such a metric that takes into account 10 years of data.
In terms of dividend coverage, Hormel Foods and General Mills are expected to deliver earnings-per-share of $1.82 and $4.10 in their current fiscal years. These numbers, in turn, imply a payout ratio of 57.1% and 52.6%, respectively. Hormel’s payout ratio is only slightly heavier compared to that of General Mills, despite the former’s much faster dividend growth pace over the past decade. This also hints at Hormel’s better earnings-per-share growth over the same period.
In favor of General Mills, its dividend yield of 2.9% offers a better proposition to income-oriented investors versus Hormel’s 2.3% during a rising-rates environment. Still, all the other attributes attached to Hormel’s dividend appear more attractive overall.
Is HRL Stock a Buy, According to Analysts?
Turning to Wall Street, Hormel Foods has a Hold consensus rating based on one Buy, four Holds, and one Sell assigned in the past three months. At $48.33, the average Hormel Foods stock price prediction implies 6.4% upside potential.
Is GIS Stock a Buy, According to Analysts?
General Mills has also attracted mixed sentiment, with the stock featuring a Hold consensus rating based on two Buys, eight Holds, and two Sells assigned in the past three months. At $77.92, the average General Mills stock price prediction implies just around 2.6% upside potential.
Conclusion: Fair Dividend Picks, but Not at These Prices
As consensus estimates point out, there is limited upside to be expected from Hormel and General Mills. Hormel is likely to be appreciated by dividend-growth investors. This could be the case for General Mills as well for investors that are more conservative and would grab the higher yield upfront. Still, with both of their stocks going against the tide of the market over the past year, their valuations have run ahead of themselves.
Based on their consensus earnings-per-share estimates, as stated above, Hormel and General Mills are currently exchanging hands at forward P/E ratios of 24.9x and 18.7x, respectively. These are steep multiples with rates on the rise, even if their qualities should shine during the current market environment.
