The Hershey Company (NYSE: HSY) needs little introduction given its position as one of the largest confectionery companies in the United States. You have probably indulged in one of its products, like a Hershey bar or Reese's, sometime in the recent past. But Hershey is facing one major problem and a couple of smaller ones right now, which could set up a buying opportunity for long-term investors. Here's what you need to know.
Hershey makes chocolate, but it is much larger than just its namesake brand. It also owns Reese's, Kit Kat, York, and Cadbury, among many others. The consumer staples company's confections product portfolio expands beyond chocolate as well, with brands like Twizzlers, Bubble Yum, Breath Savers, and Jolly Rancher. Hershey has also been branching out into salty snacks with brands like Dot's Pretzels, Skinny Pop, and Pirate's Booty.
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To be clear, this is not a highly diversified food maker. Hershey is squarely focused on snacks and has a heavy focus on sweets. But it owns a host of industry-leading brands that have a long history of success. That's highlighted by Hershey's dividend track record. The dividend has been increased annually for 15 years, but it has trended steadily higher for much longer than that.
The dividend growth rate, meanwhile, has been quite high over the past decade, at roughly 10% a year on an annualized basis. With a strong core business, this is the kind of stock a dividend growth investor could really sink their teeth into for the long haul. That's particularly true when you consider that the 3.6% dividend yield is near the highest levels in the company's history.
HSY data by YCharts
Investors looking to maximize the income their portfolios generate probably won't be all that impressed by Hershey's yield. But, historically speaking, it is quite high, hinting that the stock is on sale right now. There's a good reason for this circumstance. In fact, there are a couple of good reasons.
The big, headline-grabbing problem facing Hershey today is cocoa prices, which have skyrocketed recently. So far the company's hedging efforts have limited the negative impact, but those hedges are going to start rolling off and 2025 is going to be a tough year on the profit margin front.
That said, Hershey is used to dealing with volatile commodity prices and will eventually pass its higher costs on to consumers. It will also look to cut costs where it can. This is just how consumer staples companies deal with inflation. This is an extreme situation, but given the generally low cost of the indulgent treats that Hershey makes, it seems unlikely that consumers are going to suddenly stop eating chocolate.
But that is what some investors seem to fear thanks to two other issues Hershey is facing. New weight loss drugs and what looks like a government shift toward promoting healthier lifestyles could depress demand for Hershey's products. That would be an issue, but again, people love chocolate, sweets, and snacking. And even if there is a shift in buying habits, Hershey will shift along with it as best it can (perhaps leaning into the health benefits of the flavonoids and antioxidants found in chocolate). That's also the normal path in the consumer staples space.
All in, there are problems facing Hershey, but none of them seem likely to permanently derail its business. Given the elevated yield, investors are nevertheless in a dour mood -- which is why the stock has fallen a massive 45% since hitting all-time highs in 2023. More traditional valuation metrics, like the price-to-sales and price-to-earnings ratios, confirm that the stock's price looks cheap today, given they are below their five-year averages.
Unless you believe that Hershey's business is suddenly going into a long-term decline, the stock looks attractive for dividend growth and growth and income investors. It may take a strong stomach to buy it while the rest of Wall Street is so clearly worried about the future. But if you do, it could set you up with a lifetime of income backed by a business that makes beloved treats. And, as a side benefit, it is the kind of investment that you can talk about with your kids to get them interested in investing, too.
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Reuben Gregg Brewer has positions in Hershey. The Motley Fool has positions in and recommends Hershey. The Motley Fool has a disclosure policy.