Money can buy a lot of things.
But most of the really expensive things in life (such as, say, yachts) are not likely to add a lot of value or happiness to one’s life.
However, freedom is something that is very likely to add an immense amount of satisfaction to one’s life.
The good news?
Freedom has a surprisingly affordable price tag.
Via dividend growth investing, a long-term investment strategy involving the buying and holding of shares in world-class businesses paying out regularly growing dividends, one can achieve financial freedom fairly quickly.
Owning stock in some of the best businesses in the world – businesses that are generously rewarding their shareholders with ever-more cash dividend payouts – can lead to life-changing results.
You can find hundreds of such businesses over at the Dividend Champions, Contenders, and Challengers list – a rich source of data on US-listed stocks that have raised dividends each year for at least the last five consecutive years.
That’s my real-money portfolio which generates enough five-figure passive dividend income for me to comfortably live off of.
Indeed, this allowed me to retire in my early 30s.
My Early Retirement Blueprint shares more on how that was made possible.
Now, while dividend growth investing can be a direct path toward financial freedom, valuation at the time of making any investment is a critical consideration.
While price is what you pay, it’s value that you get.
An undervalued dividend growth stock should provide a higher yield, greater long-term total return potential, and reduced risk.
This is relative to what the same stock might otherwise provide if it were fairly valued or overvalued.
Price and yield are inversely correlated. All else equal, a lower price will result in a higher yield.
That higher yield correlates to greater long-term total return potential.
This is because total return is simply the total income earned from an investment – capital gain plus investment income – over a period of time.
Prospective investment income is boosted by the higher yield.
But capital gain is also given a possible boost via the “upside” between a lower price paid and higher estimated intrinsic value.
And that’s on top of whatever capital gain would ordinarily come about as a quality company naturally becomes worth more over time.
Undervaluation introduces a margin of safety.
This is a “buffer” that protects the investor against unforeseen issues that could detrimentally lessen a company’s fair value.
It’s protection against the possible downside.
Steadily acquiring undervalued high-quality dividend growth stocks is a fantastic way to achieve financial freedom – one of the best and most affordable things money can possibly buy.
But being able to spot undervaluation first requires one to understand the ins and outs of what valuation is all about.
This is why Lesson 11: Valuation is such a great read.
Written by fellow contributor Dave Van Knapp, it explains what valuation is and how it works by using clear and simple terminology to cut through the noise.
With all of this in mind, let’s take a look at a high-quality dividend growth stock that appears to be undervalued right now…
Hormel Foods Corp. (HRL) is an American multinational food processing company.
Founded in 1891, Hormel is now a $13 billion (by market cap) food titan employing around 20,000 people.
The company reports results across three segments: Retail, 62% of FY 2025 sales; Foodservice, 33%; and International, 6%.
Hormel is largely involved in production and marketing of a variety of meat and food products in the US through major national retail channels.
These products are sold under known, trusted brands that include Black Label, Jennie-O, Planters, Skippy, and Spam.
Many legacy packaged food producers in the US have been struggling in recent years as a bevy of challenges cropped up simultaneously (e.g., increasing private label competition, evolving consumer tastes, GLP-1 drugs, etc.).
Hormel is in such unfortunate company, and some of its fundamental metrics are shadows of their former selves.
However, there are two factors that could make this a compelling investment right now.
First, the stock is trading near multiyear lows in both pricing and valuation terms.
Multiples have seriously compressed, pricing in a lot of risk/fear, making the go-forward proposition much more interesting relative to where things were at as recently as five years ago.
Second, its focus on protein is a strength in a GLP-1 world.
Stuff like fried foods and sugary sweets – especially so-called “empty calories” – are being more directly impacted by GLP-1s based on how these drugs reduce certain desires.
People still have to eat, regardless of whether or not they’re on weight-loss drugs.
And basic protein, such as lean turkey, seemingly has endless and timeless appeal.
This latter truth is what’s held up Hormel for more than a century, allowing the company to consistently grow its revenue, profit, and dividend for almost that entire time.
Dividend Growth, Growth Rate, Payout Ratio and Yield
As evidence of how incredibly consistent Hormel has been, the company has increased its dividend for a stunning 60 consecutive years.
It’s a vaunted Dividend Aristocrat more than twice over.
The 10-year dividend growth rate of 8.8% is quite strong, but dividend growth has been steadily slowing over the last decade and recently settling into a low-single-digit range.
There are two things to mention about this.
First, unlike some other companies in its space, Hormel has not cut its dividend.
Second, the market has already adjusted to this slowing growth.
That’s led to the stock’s yield rising to 4.6% – 170 basis points higher than its own five-year average.
If we go back to about 10 years ago, this stock routinely yielded less than 2%.
It’s now yielding more than a lot of REITs an utilities, which is where yield is usually found.
The issue here is, despite the slowing dividend growth, the payout ratio has climbed to an uncomfortable level of 79.6% (based on midpoint guidance for this year’s adjusted EPS).
Also, the dividend has been sucking up almost all of the company’s free cash flow.
However, this is a rare case in which I’m not bothered by such a high payout ratio.
The Hormel Foundation owns nearly 50% of Hormel and relies on Hormel dividends to fund operations, so it is highly, highly unlikely that Hormel would cut its dividend.
For those who appreciate the simple business model and believe future prospects are better than what’s transpired over the last several years, a near-5% starting yield from a Dividend King is likely to be quite enticing and worthy of accepting the challenges.
Revenue and Earnings Growth
As enticing as that may be, though, a lot of what we see above is based on a past track record.
However, investors must constantly be minding the future, as the capital of today gets put on the line and risked for the rewards of tomorrow.
This is why I’ll now build out a forward-looking growth trajectory for the business, which will be implemented when the time comes later to estimate fair value.
I’ll first show you what the business has done over the last ten years in terms of its top-line and bottom-line growth.
And I’ll then reveal a professional prognostication for near-term profit growth.
Amalgamating the proven past with a future forecast in this way should allow us to judge where the business might be going from here.
Hormel’s revenue advanced from $9.5 billion in FY 2016 to $12.1 billion in FY 2025.
That’s a compound annual growth rate of 2.7%.
Very decent top-line growth for a mature food company, considering all of the challenges being encountered.
Meanwhile, earnings per share slightly decreased from $1.64 to $1.37 (adjusted) over this period.
Obviously, not the kind of result any shareholder really wants to see.
But it’s really the go-forward setup that matters a lot more, as we can’t make money tomorrow on what happened yesterday.
On this front, there are reasons to be encouraged.
First, the price and valuation are roughly half of where they were a decade ago, and the yield is about twice as high as it was then.
Less expectations regarding the future, more income for today.
With reduced expectations, Hormel doesn’t have to do as much.
Second, Hormel has shown signs of life in recent quarters, with 14.3% YOY adjusted EPS growth for Q2 FY 2026 along with guidance for 7.3% YOY growth in adjusted EPS (at the midpoint) for FY 2026.
The stock and business may have bottomed out.
Looking forward, CFRA currently has no three-year EPS growth forecast.
The lack of a headline forecast is disappointing, but later in the report reveals the anticipation for $1.50 in EPS for FY 2026 (up 9% YOY) and $1.56 in FY 2027 (up 4% YOY).
CFRA also calls FY 2025’s $1.37 in EPS a “trough”.
CFRA admits the last several years have been tough, specifically calling out a challenging consumer environment and higher input costs.
On the flip side, CFRA strikes an optimistic tone, noting lower pork costs, improving markets, and easier comps.
That last point is the one I just highlighted earlier.
Put simply, the lower the bar, the easier it is to clear it.
One does not need to make heroic assumptions about Hormel in order to make a long-term investment.
As long as the business can generate somewhere in the neighborhood of mid-single-digit business and dividend growth (far off from historical norms, but closer to recent trends), the near-5% yield gets you the rest of the way toward a 10% or so annualized total return from here – even without a recovery of multiples.
A rerating higher would be an extra boost.
The stock’s 50% drawdown over the last five years has no doubt been painful for those who have held through the ride, but there appears to be some light at the end of the tunnel here.
Financial Position
Moving over to the balance sheet, Hormel has a very good financial position.
Its long-term debt/equity ratio is 0.4, while the interest coverage ratio is around 10.
While these are not bad numbers at all, Hormel’s balance sheet has degraded over the last decade.
A decade ago, Hormel’s balance sheet was swimming in net cash.
That said, Hormel commands very high credit ratings that are well into investment-grade territory: A1, Moody’s; A-, S&P.
Hormel has no financial issues whatsoever, but I am somewhat sad to see the erosion.
Profitability has a similar story.
It’s good, but not quite as good as it used to be.
Return on equity has averaged 10.8% over the last five years, while net margin has averaged 6.7%.
Hormel was doing ~20% ROE and ~10% net margin a decade ago, so the slide is real.
Overall, Hormel is not as good as it used to be, but it remains a strong business selling basic, timeless, protein-forward products.
And with economies of scale, brand power, and entrenched relationships with retailers, the company does benefit from durable competitive advantages.
Of course, there are risks to consider.
Competition, regulation, and litigation are omnipresent risks in every industry.
Competition is only growing, as Hormel now faces competition from both traditional food companies as well as retailers themselves (via private labels).
Regulation is also becoming a growing issue, especially with the current administration’s views on packaged/processed foods.
GLP-1 weight-loss drugs are structurally reducing demand for all kinds of food products, although Hormel’s focus on protein helps to insulate it somewhat.
Input costs are volatile.
Hormel is exposed to geopolitics and exchange rates via its international arm, but its international sales are modest.
Farm animals are susceptible to disease, which can dramatically affect supply availability from year to year.
The risks have grown for Hormel, which has weighed on the business and stock.
But with the stock now down about 50% over the last five years, any degradation in the business has clearly and firmly been met by a degradation of the valuation…
Valuation
The P/E ratio is sitting at 17.4, based on midpoint guidance for this year’s adjusted EPS.
That’s about as low as I’ve seen it on this stock, and it compares very favorably to its own five-year average of 23.7.
The P/CF ratio, which bypasses the GAAP messiness, is sitting at just 12.9, which is low in absolute and relative terms.
For most of my time as an investor (which stretches back more than 15 years), this stock has commanded a cash flow multiple of 20 or higher.
And the yield, as noted earlier, is significantly higher than its own recent historical average.
So the stock looks cheap when looking at basic valuation metrics. But how cheap might it be? What would a rational estimate of intrinsic value look like?
I valued shares using a dividend discount model analysis.
I factored in a 10% discount rate and a long-term dividend growth rate of 5.5%.
I’m basically splitting the difference between Hormel’s long-term dividend growth rate and its more recent showings.
The days of high-single-digit to low-double-digit dividend growth are almost certainly over, but I think a mid-single-digit type of dividend growth rate is a reasonable expectation to have at this point.
If we parse CFRA’s numbers, it seems like mid-single-digit EPS growth is what’s being assumed over the next few years.
Also, recent results have indicated a real turning point.
The payout ratio is high, but it’s not unsustainable, and the foundation involvement further encourages Hormel to continue paying and growing the dividend.
I’d be surprised if Hormel can manage much more than I’m modeling in, but I don’t think they’ll come in far lower.
The DDM analysis gives me a fair value of $27.43.
The reason I use a dividend discount model analysis is because a business is ultimately equal to the sum of all the future cash flow it can provide.
The DDM analysis is a tailored version of the discounted cash flow model analysis, as it simply substitutes dividends and dividend growth for cash flow and growth.
It then discounts those future dividends back to the present day, to account for the time value of money since a dollar tomorrow is not worth the same amount as a dollar today.
I find it to be a fairly accurate way to value dividend growth stocks.
I view this as a stock that has been marked down a bit more than it’s deserved.
But we’ll now compare that valuation with where two professional stock analysis firms have come out at.
This adds balance, depth, and perspective to our conclusion.
Morningstar, a leading and well-respected stock analysis firm, rates stocks on a 5-star system.
1 star would mean a stock is substantially overvalued; 5 stars would mean a stock is substantially undervalued. 3 stars would indicate roughly fair value.
Morningstar rates HRL as a 4-star stock, with a fair value estimate of $28.00.
CFRA is another professional analysis firm, and I like to compare my valuation opinion to theirs to see if I’m out of line.
They similarly rate stocks on a 1-5 star scale, with 1 star meaning a stock is a strong sell and 5 stars meaning a stock is a strong buy. 3 stars is a hold.
CFRA rates HRL as a 3-star “HOLD”, with a 12-month target price of $25.00.
We have a pretty tight consensus this time around. Averaging the the three numbers out gives us a final valuation of $26.81, which would indicate the stock is possibly 5% undervalued.
With a market-smashing yield, high-single-digit dividend growth, a manageable payout ratio, 60 consecutive years of dividend increases, and the potential that shares are 5% undervalued, income-seeking dividend growth investors have a shot at a Dividend King near multiyear lows.
-Jason Fieber
Note from D&I: How safe is HRL‘s dividend? We ran the stock through Simply Safe Dividends, and as we go to press, its Dividend Safety Score is 80. Dividend Safety Scores range from 0 to 100. A score of 50 is average, 75 or higher is excellent, and 25 or lower is weak. With this in mind, HRL’s dividend appears Safe with an unlikely risk of being cut. Learn more about Dividend Safety Scores here.
P.S. If you’d like access to my entire six-figure dividend growth stock portfolio, as well as stock trades I make with my own money, I’ve made all of that available exclusively through Patreon.
Disclosure: I have no position in HRL.