The Hershey Company (HSY 0.56%) stock is one that has likely frustrated its long-term shareholders. It has delivered a flat performance over the last five years, largely because it has dropped more than 40% from its peak in May 2023. Skyrocketing cocoa prices have weighed on sales, pressuring the stock and its financials.
Nonetheless, such challenges may actually prompt investors to buy the chocolate stock. Three critical reasons show why investors should consider opening positions now.
At first glance, it seems understandable to sell Hershey stock amid the cocoa shortage, which affects more than 80% of the company's revenue. The company's 2024 revenue was $11.2 billion, an increase of less than 1% from year-ago levels. Although revenue did not technically drop, rising prices appear to have led to the company selling less product.
Moreover, existing cocoa trees are producing less cocoa, and illness has hurt cocoa production further. The industry has also underinvested in production. Producers can increase production, but it will take years for some of that investment to yield more cocoa.
However, the fact that revenue grew at all under these conditions is a strong indication of the power of Hershey's brand and the enduring demand for its chocolate.
Also, the high cocoa prices provide a compelling incentive for the industry to address the underinvestment of the recent past. For these reasons, the company can probably weather this crisis, positioning Hershey to benefit as cocoa production improves over time.
Additionally, Hershey's dividend deserves particular attention. The company recently declared its 380th consecutive quarterly dividend, meaning it has maintained a payout for 95 straight years. Hershey also tends to pass yearly increases, and the payout has risen yearly since 2009.
Today, shareholders earn $5.48 per share in annual dividend income. This amounts to a dividend yield of 3.42%. That is nearly triple the S&P 500 index average of 1.2% and is also the stock's highest yield since 2009.
Hence, not only can new investors benefit from a historically high dividend return, but the yield on current and past stock purchases should rise over time since Hershey tends to increase its payout in most years.
Furthermore, the current price of the stock likely reflects the challenges currently faced by Hershey. The company's P/E ratio has fallen below 15. This is the lowest level since 2000 for a metric that has declined for years. Investors may recall that it was only two years ago that Hershey sold for more than 30 times earnings.
Admittedly, an expected drop in profits takes its forward P/E ratio to 26, which may have discouraged some investors from buying Hershey stock.
Nonetheless, its price-to-sales (P/S) ratio of 3.3 is near multiyear lows. It last reached that sales multiple in early 2020 during the stock sell-off at the beginning of the coronavirus pandemic.
Ultimately, both of these metrics position Hershey for prospective buyers. Considering the history of the stock, an opportunity to buy this cheaply may not come again for years.
Given the current conditions, its challenges should not undermine Hershey's long-term value proposition, likely making now an excellent time to buy Hershey stock.
Indeed, the cocoa shortage will probably persist for the foreseeable future. However, the company has managed to increase revenue during this time, a testament to its brand strength.
Additionally, the dividend yield is at its highest level since 2009. Considering that return and the company's longtime historical pattern of payout hikes, buying now could greatly benefit income investors.
Furthermore, its P/E and P/S ratios are near multiyear lows, and the history of the stock shows it has paid to invest in Hershey during such times.
Ultimately, Hershey appears to offer a compelling value proposition under these conditions. Between the low valuation metrics and the high dividend returns, buying the stock now could deliver investors both growth and income.
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