Is Hershey a Good Dividend Stock to Buy?

Hershey (NYSE:HSY) is one of the most recognizable consumer brands in the United States. The company is virtually synonymous with candy, making it a longtime favorite of investors looking for buy-and-hold assets.

Hershey is also widely held as a dividend stock, not least because its business model facilitates the return of large hoards of cash to its shareholders. But is Hershey a good dividend stock to buy now?

Hershey Dividend Yield, Payout & History

Each share of Hershey currently pays $4.14 for a yield of 1.69 percent.

Hershey has raised its dividend at a fairly rapid pace in recent years. The 3-year compounded annual growth rate for the payout is over 9 percent. Hershey’s payout ratio is 52 percent, which is reasonably safe for a business that seems to be intent on passing more cash to its shareholders.

Investors should note, though, that Hershey’s dividend growth rate is expected to slow in the near future. Analysts project the 3-year forward CAGR for Hershey’s dividend payouts to be 4 percent. While still a reasonable dividend growth rate, this represents a significant slowdown compared to the last three years.

Hershey has a 13-year track record of dividend increases. Combined with its longstanding dominance within its industry and safe payout ratio, this makes Hershey reasonably attractive for investors seeking stable, long-term income from their portfolios.

One drawback to Hershey as a dividend stock, however, is its low yield. Throughout much of the 2010s, Hershey shares yielded over 2 percent. The lower yield is a function of steadily increasing share prices, but investors who buy today will have to pay considerably more for their dividends.

Hershey Sales Up 16.1%

In 2022, Hershey’s net sales rose 16.1 percent to total $10.42 billion. Net income per diluted share saw similar growth, rising 12 percent.

Management’s guidance for 2023 suggests that these growth rates could continue at relatively high levels. The company expects revenue growth of 6-8 percent and earnings growth of 11-15 percent in FY 2023.

Over the coming year, analysts expect to see Hershey increase its earnings by nearly 8 percent from $9.39 per share to $10.14 per share. While lower than management’s projections, this rate will likely be more than enough to keep investors interested in the stock. Hershey offers a superior return on equity of 57.76 percent, while its net margin stands at 15.79 percent. Barring any unforeseen obstacles, earnings could continue to grow at reasonable rates for several years.

Will Hershey Stock Go Up?

While Hershey is unlikely to lose much ground thanks to its strong competitive position, the stock isn’t expected to gain much over the next year.

19 analyst forecasts the share price can climb to $251. This would produce a return of just 2.5 percent from the most recent price of $244.94. Although the stock’s dividend would increase the total return to about 4.2 percent, the stock will likely underperform the market in 2023.

Hershey appears to be slightly overvalued at today’s prices. The company’s price-to-sales ratio of 4.79 is quite reasonable, but its P/E ratio of 26.03 is somewhat high compared to the broader market at the moment.

Hershey’s valuation is something of a mixed bag, but overall the company likely trades a bit above its fair value.

What Could Impact Hershey Stock?

A drawback for those buying Hershey for its dividend should consider is the fact that stock’s yield is toward the low end of its recent range. Given that the rate of dividend increases is expected to slow over the next three years, investors buying Hershey for income today may be paying too much for the income the stock will generate in the near future.

Hershey may also be carrying too much debt at a time when interest rates are rising rapidly. The company’s debt-to-equity ratio is 1.01, higher than ideal for a mature business like Hershey.

Hershey’s current ratio and quick ratio are also both significantly below 1.0, suggesting that the company may not be in the best position to manage its liabilities. While these are not immediate concerns, investors should be aware of the financial health of the company before buying stock.

Is Hershey a Good Dividend Stock to Buy Now?

Hershey offers a stable, growing dividend that may make it attractive to investors looking for stocks to buy and hold for long-term income. With excellent profitability metrics and growing earnings, it’s likely that Hershey will be able to continue increasing its distributions for quite some time.

Hershey also has the advantage of being a dominant company in an extremely stable line of business. Even with consumer behaviors shifting toward health-conscious options in many areas, the average American still consumes about eight pounds of candy annually. With a 33.5 percent share of the chocolate market, Hershey has a strong competitive advantage that is unlikely to weaken anytime soon.

On the downside, Hershey’s somewhat low yield and limited prospects for near-term dividend growth could make it less suitable for investors focused exclusively on income. Even in today’s low-yield market, it’s far from difficult to find stocks in well-established, dominant companies that pay 2 percent or more. As such, investors concerned only with dividends may want to look at other companies or wait for a better opportunity to buy Hershey.

Taking all of this into account, Hershey seems to be a good fit for somewhat conservative investors seeking a blend of income and long-term growth from their portfolios. Hershey’s yield may not be ideal for pure income investors, but the company’s ongoing earnings growth could make up for low yields through gradual share price appreciation.

Investors seeking safe havens from inflation and recession risks may also like Hershey, as consumer stocks with recognized brands tend to fare well during difficult macroeconomic times.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.