The allure of Coca-Cola (NYSE: KO) as an investment is undeniable, with its esteemed Dividend King status and an attractive dividend yield exceeding 3%.
This makes it a staple in many investment portfolios, particularly for those seeking reliable income. However, Coca-Cola isn’t the only contender in the consumer staples arena deserving of investor attention, especially for those with a contrarian bent and an eye for value and looking for alternate options.
However, Hormel Foods (NYSE: HRL), another Dividend King, presents a compelling alternative, albeit one that’s currently out of favor with the market.
Coca-Cola: A Steady Performer
Coca-Cola’s business model, centered around the sale of flavored beverages, has cemented its position as an iconic brand worldwide.
Its remarkable track record of 61 consecutive years of dividend increases underscores its commitment to shareholder returns, earning it the prestigious title of Dividend King.
While its 3% dividend yield is appealing, especially when compared to the average yields of S&P 500 index funds, it’s important to note that this yield is relatively standard for Coca-Cola based on its historical performance.
Valuation-wise, Coca-Cola’s price-to-sales (P/S) and price-to-earnings (P/E) ratios sit below their five-year averages.
However, when examined in the context of its long-term pricing history, the stock’s current valuation does not indicate a significant undervaluation, positioning it more as a fair value investment rather than a deep value opportunity.
Hormel Foods: A Contrarian Opportunity
In contrast, Hormel Foods emerges as a distinct option within the consumer staples sector, particularly for investors inclined towards contrarian strategies or seeking undervalued stocks.
Like Coca-Cola, Hormel has a commendable dividend history, with 57 years of consistent annual increases. Its dividend yield, at 3.6%, not only surpasses that of Coca-Cola but also represents a historical high for the company, suggesting Hormel’s stock might be undervalued.
Hormel’s current predicament, characterized by investor pessimism, stems from several challenges. The company has struggled to pass on inflationary costs to consumers effectively, faced disruptions from avian flu, encountered difficulties integrating the Planters acquisition during a downturn in the nut market, and experienced slower-than-anticipated growth in China post-COVID-19 lockdowns.
While daunting when combined, these obstacles are not insurmountable and are likely temporary, requiring time and strategic management to overcome.
Given Hormel’s proven track record and resilience as a Dividend King, there’s a strong case to be made for the company’s ability to navigate through these turbulent times.
A turnaround in Hormel’s fortunes could prompt a reevaluation of the stock by the market, potentially leading to significant gains for investors who choose to buy in during this period of undervaluation.
Weighing Your Options
Choosing between Coca-Cola and Hormel Foods doesn’t necessarily boil down to a clear-cut decision. Coca-Cola offers stability and a fair valuation, making it a solid choice for conservative investors seeking steady returns.
On the other hand, Hormel represents a value-driven opportunity for those willing to embrace a contrarian approach, offering a higher yield and the potential for valuation expansion as it addresses its current challenges.
For investors drawn to underappreciated stocks or those who thrive on contrarian investing principles, Hormel Foods may present the more enticing option, boasting a robust dividend history, an elevated yield, and a valuation that hints at significant upside potential once current headwinds are navigated successfully.
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I’m Jackson Hartwell, a writer who specializes in dissecting political events. I’m dedicated to providing you with clear and concise insights into the world of politics, making it easier to understand the latest news and developments.