ID’ing Cabot’s teased “#1 top dividend stock recommendation”

By Travis Johnson, Stock Gumshoe, November 7, 2018

It’s hard to get people lusty about dividends when small tech stocks and marijuana stocks are going bonkers… but perhaps now that October has reminded us of the “stocks fall faster than they rise” rule, a return to “boring” is in the offing.

At least, it seems that’s the hope of Cabot Dividend Investor, which is trolling for new subscribers with bait that includes a reference to “My latest #1 top dividend stock recommendation” — so now that we’re all exhausted by the midterm mania, let’s settle in for a rest on the puffy old couch that is dividend investing and see if we can’t lounge our way to revealing that teased stock.

The ad comes in from Chloe Lutts Jensen, who is part of the “family business” at Cabot (I think Carlton Lutts must have been her grandfather, he started the Cabot letters in 1970)… much of the spiel is just about dividend investing in general — trying to break down what she says are the “myths” of dividend investing (that dividend-paying stocks grow slower, that you have to give up returns for safety, that current yield is the best measure, and, yes, that dividend investing is boring), which is an admirable goal. The more we chase the silly speculations, the more we miss out on the power of compounding.

And then she gets into the tease…

“My latest addition to the portfolio is in the consumer staples sector. They own a wide range of consumer brands found in grocery stores and other large retailers. Strong market or weak, stable or volatile, the market for these goods stays strong.

“That’s why this company’s income and earnings have increased steadily over the past 10 years. After a slight slowdown last year this year has returned to form, with earnings up 15%, sales up, and taxes down.”

She says that analysts are forecasting growth, too — 5% revenue growth and 20% earnings growth, so that’s perhaps not super-sexy… but 20% earnings growth is pretty high for a consumer staple stock (Hershey, which I own a few shares of, is likely to grow earnings by not much more than 5-6%, Procter & Gamble is in the 7% neighborhood, Colgate Palmolive is more like 2-3%… you get the idea).

And we’re told that this company has grown its dividend every year for 50 years, which puts them in rarefied territory — there are 100 or so “Dividend Aristocrats” who have grown their dividend annually for 25 years or more, but only about 20 “Dividend Kings” who have done the same for half a century.

And, apparently, the dividend growth has been pretty decent — more from Chloe:

“Over the past 5 years alone, the dividend growth has averaged more than 15%.

“The dividend payout ratio is still low (averaging 38% over the past 5 years) so there’s no reason to believe the growth won’t continue.”

So… hoodat? This is, sez the Thinkolator, none other than the Spam king — Hormel Foods (HRL), which, despite its seriously non-sexy nature, is close to hitting an all-time high stock price right now.

Hormely doesn’t have a particularly high dividend, with a current yield of 1.7%, but the dividend has been paid for 100 years or so, and grown annually for 52 years… and the increases have recently been meaningful, the last hike was by 10%. That adds up if you can be patient, and they are likely to declare their next dividend increase around the time that they report their fourth quarter earnings — which will be two weeks from yesterday, on November 20.

Hormel is mostly a portfolio of slow-growth brands that you’re probably familiar with — the namesake Hormel products like chili, bacon and other prepared meat foods, Spam, and Dinty Moore stews, and Skippy peanut butter, but they do also have some growth areas like prepared guacamole and salsas, Applegate Naturals sausages and meat products, frozen pizzas and deli products, and Muscle Milk that they use to try to appeal to younger generations.

You can see their latest corporate investor presentation here if you’d like more background, they say that they are aiming for 5% top line growth and 10% earnings growth as they invest in innovation, modernize their supply chain, and try to broaden their marketplace.

So it’s probably not the most exciting idea out there, and returns will be probably limited to less than 10% a year over the next 5-10 years, given the relatively high current valuation (24X current earnings), but they’ll probably be around for a long time and they aren’t big risk-takers — they don’t carry a lot of debt, the dividend increases will almost certainly continue, and they have pretty consistently posted a return on equity of 15-20% for 25+ years, despite the fact that I probably haven’t had a can of Dinty Moore Beef Stew since I was a boy scout 35 years ago.

Asleep yet? If you have enough energy to opine on Hormel or suggest other slow-and-steady dividend growers that you think we should consider, just type those thoughts into the happy little comment box below… thanks for reading!

Are you getting our free Daily Update
"reveal" emails? If not,
just click here...

Irregulars Quick Take

Paid members get a quick summary of the stocks teased and our thoughts here. Join as a Stock Gumshoe Irregular today (already a member? Log in)