Owning shares in The Hershey Company (NYSE: HSY) has been a bitter taste in recent months. Rising cocoa prices and less appetite for chocolate left the stock rangebound, and the stock's price is down slightly from year-ago levels.
Nonetheless, consumption patterns can go in cycles, and the stock's P/E ratio is near multiyear lows. Does that mean investors should look at Hershey as a buying opportunity?
The state of Hershey today
Products such as the Hershey's Milk Chocolate Bar and Hershey's Kisses have made the company a mainstay of the American consumer industry for more than 125 years. As a food stock that has traded since 1927, its approximately 90 brands built wealth for many generations of investors.
Nonetheless, the company's investors would probably rather forget the first half of 2024, as rising cocoa prices coincided with reduced consumer spending. Consequently, Hershey's revenue for the first half of 2024 of $5.3 billion fell 3%. This was mainly because of a massive sales decline in the second quarter when sales fell 17% from year-ago levels.
A slight drop in the cost of goods sold mitigated the sales decline. Still, the $978 million net income for the first two quarters of 2024 dropped 2% from year-ago levels.
Additionally, Hershey expects these conditions to continue. The company forecasts a 2% yearly reduction in net sales growth and a drop between 1% and 3% in earnings-per-share growth in 2024.
Considering that performance, it may surprise investors that Hershey stock is down only 7% over the last year. Since it has also underperformed the S&P 500 over the last five years, they may not see much opportunity in the stock from that standpoint.
Why some investors may consider Hershey's stock
However, despite its recent performance, some investors may find opportunity in this stock. Admittedly, the 97-year trading history on the stock market makes Hershey the definition of a mature company, and growth investors are not likely to buy shares.
Still, it sells at a P/E ratio of 22, significantly below the average of 26 over the last five years. Also, in the 21st century, the earnings multiple has bounced off this level several times, indicating Hershey stock will likely move higher as business conditions improve. Such conditions indicate the decline is more likely a cyclical pullback than an indication of long-term trouble for the business.
Furthermore, investors should take a closer look at the company's dividend. The payout, which has risen annually since 2010, pays shareholders $5.48 per share annually. That amounts to a dividend yield of almost 2.8%, more than double the S&P 500 average of 1.3%.
The dividend also appears sustainable. The company's free cash flow was about $551 million, which covered the $544 million in dividend costs, albeit barely.
Still, in 2023, the free cash flow of around $1.55 billion covered the $889 million in dividend costs, indicating Hershey can pay the dividend while still reinvesting in the company or repurchasing shares. Such performance should ensure its long-term stability even as the company works through periodic slowdowns.
Should I buy Hershey stock?
Ultimately, investors should consider buying Hershey stock, but only for investing in income.
Indeed, the recent slowdown is likely temporary, and the lower P/E ratio looks like a buying opportunity. Also, its dividend yield is far above market averages.
Still, the stock has underperformed the S&P 500 over the last five years, even when accounting for dividends. Additionally, chocolate is a competitive industry. Thus, it must rely on the power of its branding to maintain and grow sales.
Moreover, Hershey has limited opportunities for expansion, meaning population growth and inflation could be the main drivers for higher net sales. That will, in turn, limit opportunities for investors, making the dividend the most apparent benefit to owning this stock.
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Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Hershey. The Motley Fool has a disclosure policy.
