This Dividend Aristocrat Has a Partial Fix for Labor-Starved Restaurants

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The world is still working to live with the coronavirus and one of the bigger problems has emerged as a labor shortage. For a service industry like restaurants, this is a huge problem.

However, Hormel foods (NYSE: HRL) is ready to help in a very interesting way. Here’s why the company’s foodservice offerings are on the rise and why this trend should continue.

Image source: Getty Images.

The pandemic and now this?

When the coronavirus pandemic broke out in 2020, non-essential stores were closed and people were encouraged to practice social distancing, including avoiding indoor group gatherings. That was a devastating blow to the restaurants, which were essentially takeaway only. Now that these rules have been relaxed and most restaurants are more fully open again, you’d think the operators would be happy. But they are not because it has become more and more difficult to find staff.

For example, a small chain with four restaurants in Florida had to close one of its locations because it couldn’t find enough employees to fill it. Anecdotal evidence suggests this is not uncommon, which is bad news for restaurants. This is because government data shows that recreational and hospitality openings are higher than any other sector. The good news of reopenings combined with a lack of employment has been difficult for restaurant owners overall. But there are some partial solutions, and the Protein-Focused Hormel offers them.

Come back strong and ready for more

Hormel is somewhat unique among food manufacturers in that it has direct relationships with the food service industry. That hurt Hormel in 2020 when demand fell due to the closings. However, since the reopening of the shops was allowed, the catering business has been doing very well. To put this dynamic in figures, Hormel’s food service sales fell by 19% in the third fiscal quarter of 2020. In the same period of 2021, food service sales increased 45%. The numbers for 2021 clearly indicate a recovery from the pandemic.

But there is one more factor that investors should be aware of. Most of Hormel’s food service products are fully cooked meat. For example, the company’s Hormel Fire Braised brand offers fully cooked proteins including various forms of chicken, pork, and beef. The Austin Blues brand makes ready-to-serve smoked meats such as ribs. And Bacon 1 offers ready-to-serve bacon. According to Hormel’s Austin Blues website, “Just open the package, add your personal touch, and impress everyone.”

Bacon is a great example of how valuable ready-made meals can be. If you’ve ever cooked fresh bacon, you know that it is time consuming and can get dirty even in small amounts. Take that up to restaurant level, and it can be a time-consuming job. A sizable restaurant can even end with a person who devotes a good portion of their shift to cooking bacon. Hormel’s pre-cooked bacon makes this process much more efficient. Restaurants pay a little more for this pre-cooked bacon, but they save staff time and effort. And that’s just an example. Hormel offers numerous other products that offer the same labor-saving benefits.

HRL dividend yield chart

HRL dividend yield data from YCharts

In today’s poor work environment, Hormel’s foodservice product line could be a lifeline that enables restaurants to deploy their limited staff more efficiently. This is a win / win that investors shouldn’t underestimate, especially since foodservice sales accounted for around 25% of Hormel’s sales in fiscal 2020 and about 30% in fiscal 2019 from the forced closure and look for ways to deal with lower Workforce strength. In the longer term, however, satisfied restaurants could result in this segment of the Hormel business operating at a higher level, as the personal advantages of its prepared meat products gradually come to fruition.

Best of all, this stock looks historically cheap

What’s particularly exciting here is that Hormel’s dividend yield is 2.3%, backed up by an incredible 55 years of annual dividend increases (it’s not just a dividend aristocrat, it’s an even more exclusive dividend king). While the return isn’t huge at absolute levels, it’s at the high end of the stock’s historical range of returns, suggesting that the stock is relatively cheap right now.

Part of the problem is that investors are concerned about the impact inflation will have on earnings, but during the Hormel third quarter 2021 earnings conference call, management noted that it has already started addressing this with price increases. So the inflation problem is really a temporary thing, while the opportunity to reduce labor intensity for commercial customers could take much longer as restaurants recognize the benefits of pre-cooked meat thanks to the current labor shortage.

This article represents the opinion of the author who may disagree with the “official” referral position of a premium advisory service from the Motley Fool. We are colorful! Questioning an investment thesis – even one of our own – helps us all think critically about investing and make decisions that will help us get smarter, happier, and richer.

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