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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