Contents
Summary
- Hershey’s current valuation is similar to that evidenced in FY2009 at which time we were experiencing that ‘little event’ called The Financial Crisis.
- HSY is unlikely to appeal to investors seeking companies with ‘high octane’ growth.
- The company’s dividend yield and valuation are at levels not evidenced in several years.
- I currently have a full position with a sub $50 average cost. Were this not the case I would be acquiring HSY shares.
Introduction
At the time I composed my February 3, 2018 Hershey Company (NYSE:HSY) ‘There Are Far Better Investment Options Out There’ post, HSY had just pulled back to ~$103 from a high of ~$114 at the beginning of January 2018. In that article I indicated:
‘There is a vast universe of publicly traded companies in which you can invest and many offer far more upside than HSY. While we have owned HSY for many years and have been aptly rewarded, I think you will be challenged to generate a decent return if you invest in HSY at current levels (even with the recent pullback).’
Subsequent to that article, HSY has retraced further to the current ~$90 level. Now that HSY has retraced ~$23/share (~20% pullback from ~$114) from levels recorded just 5 months ago I thought I would revisit whether HSY now presents an attractive buying opportunity.
Q1 Results and FY 2018 Projections
On April 26, 2018, HSY released its Q1 2018 results and refined its 2018 outlook.
If you look at the Q1 financial statements you may be alarmed at the sudden surge in short-term liabilities. The reason for the significant increase is that HSY completed its acquisition of Amplify Snacks Brands on January 31, 2018. The short-term debt incurred for this acquisition is being replaced by longer term debt as per the May 3, 2018 Press Release which will rectify the financial statements which are distorted as at the end of Q1 (heavy short-term debt position).
Valuation
When HSY released its Q1 results it indicated full-year reported diluted EPS in the $4.73 - $4.98 range (a $0.02 increase from initial guidance) and full-year adjusted diluted EPS in the $5.33 - $5.43 range were expected. Using both mid-points I arrive at $4.855 and $5.38.
When I wrote my February 3, 2018 article, I indicated that on the basis of FY2017’s $3.66 diluted EPS and $4.76 adjusted diluted EPS, HSY had a ~28.1 diluted PE and a ~21.64 adjusted diluted PE. In addition, using the ~$103 stock price and the mid-point of management’s projected diluted EPS ($4.84) and projected adjusted diluted EPS ($5.38), HSY had a ~21.3 forward diluted PE and a ~19.15 forward adjusted diluted PE.
At the time, I viewed these levels as high for a company that just plods along and indicated a further retracement in HSY’s stock price to the $95 level would result in a ~19.6 forward diluted PE and a ~17.6 forward adjusted diluted PE. Those levels were levels at which I felt investors could take a much harder look at initiating/increasing a position in HSY.
Well….with HSY currently trading at ~$90, the forward PE of ~18.5 and the forward adjusted PE of ~16.7 now makes HSY an even more appealing long-term investment than I had anticipated even though I expect HSY to continue to just plod along.
When I compare the current valuation with historical valuation going back to FY2008, I see that the current forward PE is roughly that of FY2009 (~18.8) when we experienced that ‘little event’ called the Financial Crisis. Now that HSY is valued similarly to that during the Financial Crisis, I see HSY as being currently attractively valued.
Dividend, Dividend Yield, and Dividend Payout Ratio
HSY’s dividend history can be found here. Surprisingly, HSY’s page which reflects its dividend history is outdated. The company’s historical dividend track record on its website reflects the most recent quarterly dividend as being $0.656 payable December 15, 2017. I know, however, that HSY declared a $0.656 dividend payable March 15, 2018 and declared another dividend of $0.656 dividend payable June 15, 2018; the dividend payable June 15, 2018 will mark the 4th dividend at the $0.656 level.
Based on HSY’s historical dividend track record I expect that in August 2018 HSY will announce a dividend increase of at least 6%; HSY’s dividend compound annual growth rate during the 2004 – 2017 period is just shy of 9%.
If HSY increases its quarterly dividend by 6%, the dividend would be ~$0.695 or $2.78/year. Using the current stock price of ~$90, HSY’s dividend yield would be ~3.1%; it certainly hasn’t been this high in a very long time!
In my opinion, HSY’s dividend yield is reasonably attractive and is safe; the May 2018 dividend was the 354th consecutive regular dividend.
As noted in my February 3, 2018 post, HSY has two classes of stock outstanding, Common Stock and Class B Stock. Holders of the Common Stock and the Class B Stock generally vote together without regard to class on matters submitted to stockholders, including the election of directors.
Holders of the Common Stock have 1 vote per share. Holders of the Class B Stock have 10 votes per share. Holders of the Common Stock, voting separately as a class, are entitled to elect one-sixth of HSY’s Board of Directors. With respect to dividend rights, holders of the Common Stock are entitled to cash dividends 10% higher than those declared and paid on the Class B Stock.
If you own HSY shares, you most likely own the Common Stock.
In my previous article I indicated that HSY had the following outstanding shares:
In 2008, HSY had a Weighted-Average Shares Outstanding (WASO) of 60,777 million Class B shares. In 2017, WASO was reduced to 60,620 million.
In 2008, HSY had a Weighted-Average Shares Outstanding (WASO) of 228,697 million Common shares. In 2017, WASO was reduced to 213,742 million.
As at the end of Q1 2018, the number of Class B shares remained unchanged at 60,620 million but the WASO of Common shares had been reduced to 211,955 million. I expect HSY to continue to reduce the number of Common shares outstanding.
Final Thoughts
HSY is certainly not a company that will appeal to investors who are looking to invest in high growth companies. In addition, this is not the type of company where you can hope for another company to come along with a really attractive take-over offer that will be accepted by HSY’s Board of Directors. The M.S. Hershey Foundation has the controlling votes and is unlikely to accept any takeover offer; the most recent takeover offer by Mondelez International, Inc. (NASDAQ: MDLZ) for $23B was spurned by HSY in 2016.
In my early February 2018 article I indicated that I viewed HSY as still richly valued even after a ~11% retracement in from the ~$114 level. With the subsequent further pullback to ~$90, I now view HSY as attractively valued.
I currently have several hundred HSY shares in one of our retirement accounts with a sub $50 average cost and view my current position to be a ‘full position’. As a result, I will not be acquiring additional shares other than through the automatic reinvestment of the quarterly dividends. If this were not the case, however, I would definitely acquire HSY shares at the current market price.
Note: Thanks for reading this article. Please send any feedback, corrections, or questions to [email protected].
Disclaimer: I have no knowledge of your individual circumstances and am not providing individualized advice or recommendations. I encourage you not to make any investment decision without conducting your own research and due diligence. You should also consult your financial advisor about your specific situation.
Disclosure: I am long HSY.
I wrote this article myself and it expresses my own opinions. I am not receiving compensation for it and have no business relationship with any company whose stock is mentioned in this article.
