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Here’s what I would buy
I like to buy companies with a long history of dividend increases while offering historically high dividend yields. On the surface, this would suggest that I might want to buy Altria (NYSE: MO) and its massive 8.7% yield. No thanks: I prefer to own Hormel Foods (NYSE:HRL) and its much lower yield of 3.1%. Here’s why.
Altria’s Core Business Is Shrinking Rapidly
Altria’s biggest business is selling cigarettes, with its iconic Marlboro brand having a massive 42% market share in the US market. The problem is that the company’s volume has been in steady decline for years as smoking has increasingly fallen out of favor. To summarize this, Q1 2024 volume was down 10% year over year. This is not an anomaly, with the company consistently increasing prices to compensate for the volume declines it has faced.
Image source: Getty Images.
The price increases protected the dividend and even allowed Altria to increase the quarterly payout steadily. At some point, though, price increases will likely exacerbate declines in the dwindling cigarette business. Worse still, the company made several strategic mistakes as it tried to adjust to changes in the cigarette space. This includes spinning off its foreign operations as Philip Morris International (NYSE: PM), a move that effectively created a new competitor in smoking alternatives like vapes. And Altria’s early investments in vapes and marijuana led to huge writedowns, effectively costing shareholders a lot of money.
Although Altria’s yield is historically high, I don’t like the business enough to buy. I prefer to own lower-yielding stocks like Hormel Foods, which has a much more attractive business.
Hormel also has problems
Hormel’s yield is just 3.1%, but that’s near the highest levels in the company’s history. Notably, it has increased its dividend annually for more than five decades, making it a Dividend King. The key here, though, is that I believe the problems facing Hormel are temporary.
For example, the food manufacturer has been less successful than its peers in transferring rising costs. Time should set prices, although margins are being squeezed in the short term. Bird flu has caused disruptions to operations in Türkiye. There’s only so much Hormel can do here, but this isn’t a new problem and it affects the entire industry. Bird flu is likely to be less of a problem over time. China’s post-COVID reopening has not been as rapid as expected. Again, given enough time, Chinese consumers will likely start shopping again. Ultimately, the company’s acquisition of Planters came at a time when the nut segment of the snack food category began to slow down. Platners is outperforming the sector, so once again, it looks like time will heal this wound as walnuts return to favor.
The story continues
Taken together, all of these problems seem daunting. Taken one by one, however, each of them is surmountable over time. That’s why investors will likely want to look at stocks while they are deeply out of favor. Notably, fiscal 2024 first-quarter earnings showed widespread improvement, with volume growth across all divisions. One quarter is not a trend and the company still has hurdles to overcome, but it seems likely that Hormel will begin to regain its footing.
Investing is balancing risk and reward
Ultimately, when I look at Altria, I see a business that is in secular decline. And, worse, the efforts that management made to resolve the problem only made things worse. A high yield is not enough to offset the risk I see in Altria. Hormel, on the other hand, has a diverse portfolio of food products that will likely face temporary headwinds. Although the yield is much lower, it is still historically high for Hormel. I’m happy to own the shares and receive these dividends as management works on its turnaround effort.
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Reuben Gregg Brewer holds positions at Hormel Foods. The Motley Fool recommends Philip Morris International. The Motley Fool has a disclosure policy.
I Wouldn’t Touch This Stock With a 10-Foot Pole: Here’s What I’d Buy was originally published by The Motley Fool