Stock Analysis: The Hershey Company (HSY)

Posted by D4L | Monday, April 28, 2008 | | 5 comments »

Linked here is a PDF copy of my detailed analysis of The Hershey Company (HSY) (alt.1, alt.2). Below are some highlights from the above linked analysis:

Company Description: The Hershey Company engages in the manufacture, marketing, distribution, and sale of various types of chocolate and confectionery, refreshment and snack products, and food and beverage enhancers in the United States and internationally.

Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description: 1.) Avg. High Yield Price, 2.) 20-Year DCF Price, 3.) Avg. P/E Price and 4.) Graham Number. HSY is trading at a discount to only 1.) above. Since HSY's tangible book value is not meaningful, a Graham number can not be calculated. If I exclude the high and low valuation and average the remaining two valuations, HSY is trading at an eye-popping 105.6% premium. HSY has a Star deducted for trading at a premium in excess of 5%.

Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description: 1.) Rolling 4-yr Div. > 15%, 2.) Dividend Growth Rate, 3.) Years of Div. Growth, 4.) 1-Yr. > 5-Yr Growth and 5.) Payout 15% of avg. HSY earned one Star for 3) above. It has grown its dividends for 10+ years. However, it had one Star deducted since its 2007 dividend payout was 122%, which was more the 15 points (15%) higher than the previous 10-year average of 53%. Combined, HSY earned net of zero Stars in this section.

Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description: 1.) NPV MMA Diff. and 2.) Years to >MMA. HSY lost one Star in this section since the NPV MMA Diff. was negative.

Other: HSY is not a S&P 500 Dividend Aristocrat but is a member of The Broad Dividend Achievers™ Index. HSY reported in their 2007 10-K that "the 2007 dividend increase represented the 33rd consecutive year of Common Stock dividend increases".

Conclusion: Quantitatively, HSY had a Star deducted in the Fair Value section, earned a net of zero Stars in the Dividend Analytical Data section and had a Star deducted in the Dividend Income vs. MMA section for a total of negative 2 Stars, since the low end of my scale is zero, HSY is rated as a 0 Star-Avoid stock.

As bad as the Quantitative data looks, I think HSY may have hope for the future. The calculated growth rate of 4.4% is based on an estimated $1.19 dividend in 2008. Using my DFL-PreScreen.xls model (available on the tools page), HSY would need a 12.2% dividend growth rate to reach the minimum $10,000 NPV MMA Diff I like to see. I am certainly not buying now, but HSY is worthy of being put on my watch list.

Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.

Full Disclosure: At the time of this writing, I do not own shares of HSY (0.0% of my Income Portfolio).

What are your thoughts on HSY?


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5 comments

  1. Dividend Growth Investor // April 28, 2008 at 10:20 AM

    I totally agree with your Avoid recommendation on the stock despite the WWY news and the 5% rise as of this morning.
    EPS for 2007 is less than EPS for 1998. P/E is higher than WWY, which is being acquired today. Payout is super high too. Only if earnings do return above 2.34 would the company be attractive again to me from a fundamental standpoint ( assuming modest dividend increases this year)

  2. Dividends4Life // April 29, 2008 at 5:47 AM

    Indeed, there is quite a bit of work the company needs to do. The one thing that impresses me is the 33 years of uninterrupted dividend growth. It is not enough to make me buy, but enough to make me watch.

    Best Wishes.
    D4L

  3. Dividend Growth Investor // April 29, 2008 at 9:40 AM

    I wonder if there are other companies out there which have increased their dividends for more than 25 years , but yet they aren't part of the Aristocrats lists?

  4. Dividends4Life // April 29, 2008 at 9:33 PM

    I just checked to make sure I didn't miss it and HSY is not on the 01/16/2008 list. I suspect on year-to-basis that they were flat somewhere in the past, but they may be counting fiscal years.

    Best Wishes,
    D4L

  5. Dividend Growth Investor // April 30, 2008 at 9:27 AM

    It seems to me that HSY was on the list only in 2001. I don't know why they removed it from the list. It might be due to a small float. In fact there are about 135 companies that have increased their dividends for over 25 consecutive years. That's a dividend mystery for me ;-)

    Oh yeah, and just for the record, my previous message was not intended to discredit you or to blame you for doing a poor job on the HSY dividend stuff. I thoroughly enjoy your analysis in PDF files. They look very professional to me.

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