Summary
- Hershey's diluted EPS and FCF payout ratios remain sustainable for the long term at 49.9% and 59.5% YTD, respectively.
- Hershey has delivered 0.8% YoY net sales growth in the first 9 months of 2020 and 5.4% YoY diluted EPS growth, which reinforces Hershey's resiliency as a business.
- Hershey's interest coverage ratio has improved slightly from ~10.9 in the 9 months ended 2019 to ~11.0 in the 9 months ended 2020.
- Bolstering the case for an investment in Hershey, is the fact that shares of the stock are trading at a 2% discount to fair value.
- Between its 2.1% yield, 7.0-8.0% annual earnings growth, and 0.2% annual valuation multiple expansion, Hershey is positioned to meet my 10% annual total return requirement over the next decade.
Given that the S&P 500 closed out last week at yet another record high, it is becoming more difficult to find quality dividend stocks that are fairly valued or undervalued.
One example of a high quality stock that I believe remains fairly valued in an overvalued broader market is Hershey (HSY), which is why I will be reexamining the stock for the first time since last July.
As I'll discuss below, Hershey's dividend remains well-covered and its long-term growth potential is intact, Hershey's operating fundamentals remain strong as both net sales and diluted EPS are poised to advance this year, and Hershey's current stock price compares well to its fair value, which is why I am reiterating my buy rating on the stock at this time.
Hershey's Dividend Remains Sustainable While High Single-Digit Annual Growth Potential Is Intact
Even though Hershey's 2.12% yield compared to the S&P 500's 1.52% yield suggests that the market views Hershey's dividend as safe, I will be examining Hershey's diluted EPS and FCF payout ratios through the first 9 months of 2020.
Hershey's diluted EPS of $4.71 through the first 9 months of 2020 works out to a 49.9% payout ratio when weighed against the $2.35 in dividends/share paid out during that time.
This is essentially unchanged from the 49.6% payout ratio through the first 9 months of 2019 (as per data sourced from page 12 of Hershey's Q3 2020 earnings press release and Hershey's dividend page).
Moving to FCF, Hershey generated $1.095 billion in operating cash flow against $292 million in capital expenditures through the first 9 months of 2020, for FCF of $813 million (according to page 5 of Hershey's Q3 2020 10-Q).
