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Hershey Has Paid Uninterrupted Dividends Since 1930

Founded in 1894 in Hershey, Pennsylvania, Hershey (HSY) manufactures and sells chocolate and non-chocolate confectionery products including: gum and mints; baking ingredients such as toppings, beverages, and syrups; and snack items, including spreads, meat snacks, bars, mixes, popcorn, protein bars, and cookies.

These products are marketed under over 80 leading brands including: Hershey’s, Reese’s, Kisses, Jolly Rancher, Almond Joy, Brookside, barkTHINS, Cadbury, Good & Plenty, Heath, Kit Kat, Payday, Rolo, Twizzlers, Whoppers, York, Scharffen Berger, Dagoba, Ice Breakers, Breathsavers, SkinnyPop, Krave, and Bubble Yum. 

Internationally, the company's brands include Munching Monkey, Pelon Pelo Rico, IO-IO, Nutrine, Maha Lacto, Jumpin, Sofit, Oatmega, Paqui, and Tyrrells.
Hershey operates through two segments:

  •  North America: 89% of revenue and 95% of operating profit
  •  International: 11% of revenue and 5% of operating profit

While Hershey sells its products in about 80 countries, nearly all of its revenue and profits are generated in the U.S. and Canada. 

Hershey has paid a higher dividend every year since 2009 and has maintained or grown its payout every year since 1930.

Business Analysis
Mature consumer foods companies like Hershey are known for their stability. Their business models usually evolve very slowly, and consumers continue to eat during good times and bad. 

Importantly, their brands enjoy prominent shelf space thanks to decades of marketing investments, longstanding relationships with retailers, and well-known tastes customers have historically been willing to pay a premium for. 

Let's take a closer look at the key advantages that have helped Hershey pay uninterrupted dividends for nearly 90 consecutive years. 

Over the past 124 years, Hershey has built up a strong assortment of popular candy and snack foods brands that the company has supported with aggressive advertising, including 15% of 2017 sales (more than $500 million). In just the last five years, Hershey's spending on advertising has exceeded $2.5 billion. 

The firm's brand-building efforts and longevity (many decades of spending to promote awareness of its products) have helped Hershey become the dominant player in North American chocolate, where it enjoys about 44% market share.

Across all U.S. confectionary sales, Hershey commands an impressive 30% market share. As you can see, private label products account for less than 3% of the market. Unlike some other food categories, when consumers want to indulge on a guilty pleasure snack in the confectionery market, they have shown a habit of buying products sold under their favorite well-known brands.
Source: Hershey Factsheet
Hershey's dominance is reflected across its top five brands (Reese's, Hershey's, Kit Kat, Ice Breakers, and Kisses), which on their own generate $5 billion in annual revenue.

The popularity of these mega brands gives Hershey a strong position with grocers, convenience stores, and other retailers in terms of securing the best shelf space. These companies want proven products that sell quickly and draw customers to their stores. 

Hershey's chocolates and snacks have long demonstrated an ability to help retailers' achieve success. Combined with its massive advertising spending, Hershey has historically defended its market share well against smaller rivals with less proven brands.

While the slow-changing nature of the packaged food industry helps Hershey defend its market share, demand rises slowly as well, tracking population growth over time.  

As a result, like many food companies, Hershey relies on acquisitions to help fuel its growth. In fact, the company and has bought over 50 businesses and brands since 1963. Most recently, Hershey's acquisitions have been focused on taking part in the "healthier snack" movement. 

In January 2018, the company acquired Amplify Snack Brands for $1.6 billion. Amplify owns several popular better-for-you snack brands such as SkinnyPop, Oatmega, Paqui, and Tyrrells. Amplify generated about $375 million in 2017 sales which means this one acquisition represents a 5% revenue increase for Hershey.

In 2015, Hershey spent an undisclosed amount to buy KRAVE Pure Foods, a leading all-natural brand of premium meat snack products, primarily premium jerky. And most recently, in September 2018, Hershey bought Pirate Brands from B&G Foods (BGS) for $420 million. 

Pirate Brands is a leading maker of cheese puffs, a $2.5 billion market segment. Pirate's sales grew 8% over the past year, showing that Hershey is buying itself far better growth than it enjoys at the company-wide level (annual sales growth has averaged about 2% over the last few years).

Despite its focus on acquisitions, Hershey has done a good job maintaining modest debt levels and a strong balance sheet. In fact, the company enjoys a strong "A" credit rating from Standard & Poor's, providing it with the financial flexibility to continue investing in its brands, acquiring on-trend products, and returning cash to shareholders.

CEO Michele Buck, who took over the top job in 2017, has made Hershey's domestic operations the key focus of the company. While Hershey has in the past tried to find stronger growth abroad, the firm has recently been selling off some international brands because it's finding that it lacks the same competitive advantages (such as in distribution and marketing power) as it does in the U.S.

Rather the company's focus is on growing market share in the U.S., including through adapting Hershey's brands and product mix to changing consumer tastes, which are increasingly skewing to healthier snacking options.

Hershey is focusing on launching more organic and natural foods, as well as less processed options that are located at the periphery of the grocery store (where consumers are increasingly shopping).

The company also plans to reduce its overall product mix in order to focus more of its marketing dollars on its strongest mega brands, which will free up additional resources for promoting its recent acquisitions.

Part of the firm's advertising strategy is to embrace a more data-driven approach. Specifically, Hershey is working with key online food sellers (like Walmart and Amazon) to gather consumer shopping data so it can better target its online advertising dollars.

For example, as more consumers shop for groceries online, Hershey can use digital reminders to showcase its relevant products to consumers as they fill up their virtual shopping carts.

While it's still early days, thus far Hershey's digital marketing efforts have shown promise. The company enjoys the second strongest brand awareness among its peers, according to research firm Garter.
Source: Hershey Investor Presentation
More importantly, as the economics of online grocery shopping evolve, Hershey touts some comforting figures about its digital business, including share gains, solid margins, higher selling prices, and bigger shopping baskets.
Source: Hershey Investor Presentation

Besides focusing on bolstering its digital position, Hershey's increasing North American focus is probably a wise move because its well-established manufacturing, distribution, and logistics chains in its home market result in very strong profitability for the company. 

For example, Hershey's operating margin is more than three times as high as its industry peers in the U.S., and its current free cash flow margin of 14% means the company is throwing off a lot of cash.

Going forward, Hershey's excellent profitability should be supported by management's belief that the firm can cut costs by $150 million to $170 million (about 2% of sales) via improved efficiencies at its U.S. factories. Those savings would further lift margins and cash flow to support a safe and growing dividend.

And given that the company has managed to increase Hershey's adjusted operating margin for the past nine years in a row (2018's margin is coming in at over 21%), investors can probably count on management to deliver on those cost savings promises.
Source: Hershey Factsheet
Over the long term, Hershey's sales seem likely to grow at a low- to mid-single digit pace. The U.S. food industry is very mature and perhaps becoming increasingly competitive due to changes in consumer tastes and shopping habits, which could make organic growth more difficult for Hershey. However, the firm's brands remain strong in its core categories, and acquisitions will continue supporting top line growth as well.

Thanks to continued cost cutting and moderate amounts of share repurchases, Hershey's earnings per share could grow at a faster pace, perhaps mid- to upper-single digits. 

Given the company's strong balance sheet and very reasonable payout ratio near 50%, Hershey's fundamentals appear to support upper single-digit dividend growth as well, assuming the company lives up to its long-term expectations.

While Hershey has indeed grown its earnings and dividend at about 9% annually over the last 20 years, making current long-term growth forecasts appear achievable, there are still risks that investors need to know about. 

Key Risks
Like many large packaged food companies, Hershey has struggled with a sharp slowdown in growth over the past few years. While the company's growth has accelerated in 2018, the company may never return to its previous sales growth levels of 7% to 9% (during a healthy economy).
Source: Simply Safe Dividends
Consumer tastes are changing, with high-calorie candy being out of fashion with today's more health-conscious consumers. While Hershey is moving in the right direction with acquiring and marketing healthier options, keep in mind that 67% of 2017 sales came from its top five mega brands, which do not fit with what might be a permanent secular trend in consumer tastes and shopping habits.

In recent conference calls, management has said that mass-market advertising for some of its smaller brands has not been having the desired returns on investment. Thus Hershey is going to be refocusing its market efforts on its core brands, but again those are its dominant candy names which are struggling to generate even modest organic growth. 

In fact, for 2018 management is currently guiding for just 2% organic sales growth. And total sales growth for the year, even excluding currency effects and divestitures, is expected to be about 5.5%. 

Remember that the Amplify acquisition alone should have boosted sales by 5.5%. This shows that Hershey could continue struggling with top-line growth, outside of making more frequent acquisitions. 

Every M&A deal also comes with the risks of overpaying for assets, increasing debt on the balance sheet, and failing to achieve the long-term cost savings or sales growth synergies that management hopes for.

Volatile commodity costs are another risk factor to consider, although they are unlikely to threaten Hershey's long-term earning power. The company's chocolate-focused products require a number of raw ingredients, including cocoa liquor, cocoa butter, and cocoa powder.

The good news is that Hershey is largely unaffected by the trade war directly, either in terms of lost market share in China (very little sales there), or in its supply chain since West Africa supplies approximately 70% of the world's cocoa.

However, the company still has to deal with volatile commodity prices that can, at least temporarily, squeeze margins.
Source: Hershey Factsheet
To protect its margins Hershey has historically been able to raise its selling prices above inflation rates, flexing the strength of its popular candy brands. 

However, mass retailers like Walmart are now struggling with their own declining margins as they move to a more online-focused (and so far less profitable) business model. As a result, Hershey could face greater resistance on raising prices than it has in the past, especially given that some of its core products are (slowly) becoming less popular with certain consumers.

Closing Thoughts on Hershey
Hershey is one of America's best food company success stories, having spent over 100 years building up a strong stable of beloved candy and snack brands. The chocolatier still enjoys a wide moat today, created by industry-leading economies of scale, a large advertising budget, and premium shelf space across its core North American market. 

Management's long-term plan to increasingly focus on healthier snack brands, while continuing to cut costs and boost margins in the firm's U.S. manufacturing and supply chains, should continue delivering safe, growing dividends over time. 

That being said, with nearly 70% of sales currently derived from just five candy mega brands, Hershey could struggle with slower sales growth than it has enjoyed in the past. Investors will want to watch Hershey's top-line growth closely in the coming years to make sure that management's long-term shift to healthier and more popular food items is actually achieved, without sacrificing margins. 

Even if long-term growth is ultimately slower than expected, Hershey should remain a cash cow with an extremely safe dividend thanks to its well-known products, the entrenched nature of guilty pleasure snacks, and management's financial conservatism.

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