Hershey (HSY 0.14%) isn't normally viewed as a high-yield stock, but its dividend yield of 3.2% today is near its highest level ever. Investors can still easily find higher yields on Wall Street. But Hershey's yield is way more attractive than the 1.2% offered by the S&P 500 index or the 2.5% you'd collect from the average consumer staples company.
Here's what's going on and why you might want to buy Hershey right now.
Wall Street is worried about Hershey
There are two notable concerns around Hershey today despite the company's alluring portfolio of snack food products. (Who doesn't like chocolate, pretzels, and popcorn?) The first problem relates to cocoa, which is the key ingredient in making chocolate. It is a commodity, and the supply-and-demand dynamics in the cocoa market have basically gone haywire, leading to a shocking rise in price. Hershey is used to dealing with commodity prices, so it hedged its exposure to cocoa in 2024. But such hedges only last for so long before they roll off.
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That's why the company is already warning investors that it will likely see "higher levels of cost of goods sold inflation throughout 2025 than we experienced in 2024." In other words, the bottom line of the income statement is under pressure as the new year gets underway.
The second big concern is a longer-term one related to the effective new weight loss drugs that have gained popularity in recent years. These drugs suppress the appetite and change eating habits more generally. So not only do people taking them eat less, they also often eat healthier foods as well. That's a double whammy for a confectioner like Hershey, and hints that its top line will be under pressure as well.
There are some other nuances, but nothing that isn't fairly normal for the business. These two negatives, however, are sizable, and they've put investors in a selling mood. That's not unreasonable.
Hershey looks historically cheap, and the pain could be temporary
The flip side of the argument here is that Hershey looks historically cheap right now, using dividend yield as a rough gauge of valuation. Given its massive 38% price decline from its peak, that shouldn't be too surprising. This could actually be a good time to invest in a company like Hershey, which has a long history of growth behind it. Over the decade that ended in December 2023, Hershey's revenue increased by around 4.5% per year on an annualized basis, while earnings per share grew at nearly 10% per year.
That may not sound like huge growth, but in the somewhat boring consumer staples sector, it's a very attractive result. Meanwhile, management has increased the dividend at an annualized rate of 10% over the past decade, which is a very impressive level for any company. If you are a dividend growth investor, you should be especially interested in Hershey right now.
But what about those big headwinds? First off, Hershey is used to dealing with commodity volatility. It will find a way to adjust just as it has in the past, and that's likely to include increasing its prices. Sure, it may take a little while for things to normalize, but this cocoa price volatility is highly likely to be temporary. In fact, the company believes that 2025 will actually see a surplus of cocoa, though management still warned that cocoa prices may require a bit of time to return to normal, given the size of the cocoa market's dislocation.
The long-term impact that the new weight loss drugs may have on the company is a bit harder to assess, but there's one thing in Hershey's favor that shouldn't be ignored: human behavior. Studies suggest that only about 50% of people actually adhere to their medication regimens when a medication must be taken long term.
It is also fairly early in the life cycle of these drugs, and adverse effects could become visible and limit their use. Notably, the weight lost comes from reductions in both fat and muscle. Losing muscle is not a positive outcome for most people. In other words, these weight loss drugs may not change the world as much as expected.
Buy while others are fearful
It can be hard to buy a stock when it seems like the rest of Wall Street is selling it. But often, that's when you'll get the best price, given investors' habit of thinking short term when considering negative events.
Given Hershey's strong history as a business, it seems like giving the company the benefit of the doubt right now will be a good choice since the problems vexing it may not be as big or long lasting as feared. That's particularly true if you are a long-term investor looking for dividend growth stocks offering historically attractive yields.
