Dividend Focus Stock: Skyrocketing Input Costs Create a Sweet Buy Opportunity
Forget gold bars. This company's bars could be much more valuable.
Our Dividend Informer analysts like the tasty prospects of this long-time leader in the food industry.
The Hershey Company is the successor to a chocolate business founded in 1894 by Milton Hershey. It has grown to become North America’s largest confectioner and second largest snack company.
Including licensed brands, confectionary products (81% of sales) include Hershey, Reese’s, KitKat, Cadbury, Almond Joy, and gums and mints sold under Ice Breaker, Breath Savers, and Bubble Yum names.
Its North American Salty Snacks division (10% of sales) offers products under brands such as SkinnyPop popcorn and Dot’s Pretzels.
International sales comprise the remaining 9% of total sales.
Overview
Consistent growth in chocolate consumption and the opportunity to raise prices have been a powerful combination at Hershey for decades. The company claims that the chocolate category has grown nationwide at a 4% annual rate since 2009 with positive growth every year for more than two decades. It is a resilient category even though it has experienced challenges of late.
After remaining relatively stable for years, cocoa prices have quadrupled over the past two years. About 70%-80% of the world’s cocoa crop is grown in West Africa, primarily Ivory Coast and Ghana, where alternating drought and flood conditions and disease have reduced production.
High prices are encouraging cocoa production elsewhere. According to a report from Jeffries & Co., cocoa represents about 20% of Hershey’s cost of goods sold. Higher commodity prices are pinching its margins as a competitive market, the availability of snacking alternatives, and a reluctant consumer discourage the price increases necessary to offset input inflation.
Read on for a description of the company’s fundamentals, overview of operations, key projections for total return from the current price, and the all-important suggested buy price for disciplined dividend investors.
Hershey hedges commodity costs 3-24 months into the future, but costs recognized on its income statement have been rising as hedges roll off.
Hershey has been making acquisitions outside of the confectionary category to leverage its marketing expertise and broad distribution network. A few years ago, it acquired SkinnyPop, a major brand of bagged, pre-popped popcorn. More recently, it acquired Dot’s Pretzels and Pretzels, Inc.
Its current share price is a stunning 45% below the all-time high reached less than two years ago. At that time, Hershey traded for more than 30x estimated 2023 EPS compared to current multiples of 17.3x trailing EPS and 19.6x consensus earnings estimates for 2025.
Management guides to on-trend sales growth of 2%-4% in 2025 but lower earnings due to higher cost inflation than it saw in 2024 plus unfavorable comparisons to a very low tax rate last year.
While a depressed share price and lower earnings are discouraging, early signs of a turnaround are emerging. The company cites numerous industry experts who believe the cocoa market will go from shortages to surplus in 2025. Cocoa futures for delivery in December 2025 are 17% cheaper than cocoa to be delivered in March 2025.
Still, the company’s commodity costs will remain elevated in 2025 as it processes cocoa acquired while prices have been high. Despite the difficult environment, Hershey has continued to introduce new products, make process improvements such as its new Enterprise Resource Planning (ERP) system in 2023, and cut costs by $100 million in 2024.
Scores
Capital Return: A
Between dividends and share repurchases, Hershey has distributed to shareholders about 75% of free cash flow since 2020. The depressed share price makes for an attractive 3.6% dividend yield and the potential for capital appreciation if its P/E recovers to historical levels once the business turns around. Dividends should increase along with earnings, which we expect to grow 8% annually.
Growth: B
Hershey estimates that the U.S. chocolate industry has grown by 4% annually without a single down year for more than two decades. The company has grown faster at 6% per year. Its focus on costs should help maintain industry-leading profit margins. Its size and the maturity of its industry limit its growth potential.
Stability: A
Hershey operates in a resilient industry with sensible competitors. High costs to establish manufacturing, distribution, and marketing act as barriers against new competitors.
Over the past four years, free cash flow after capital spending has averaged 16% of sales. Debt is a manageable 2.0x EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization). CEO Michele Buck recently announced her intention to retire on June 30, 2026.
Governance: C
The company’s Class B stock is owned by Hershey Trust Co. for the benefit of the Milton Hershey School. The school was set up by company founders to benefit disadvantaged youth. Class B stockholders receive 10 votes per share compared to one vote per common share.
The Trust controls 79% of the vote with 28% of total shares.
Three of Hershey’s 11 directors also serve as directors of the Trust. The other eight directors have appropriate backgrounds leading large companies, particularly in consumer products.
The company appears to be run in a businesslike manner, but the Trust's controlling stake effectively prevents any potential acquisition of the entire company.
The Hershey Co. is traded on the NYSE under the symbol HSY.
Website: www.TheHersheyCompany.com