Friday, August 22, 2014

Dividend Stock Analysis of Hershey (HSY)

The Hershey Company (NYSE:HSY), together with its subsidiaries, manufactures, markets, distributes, and sells chocolate and sugar confectionery products, pantry items, and gum and mint refreshment products. The company has paid dividends since 1930 and has managed to increase them for 5 years in a row. Prior to the dividend freeze in 2009, the company was a dividend champion that had managed to raise dividends for 34 years in a row.

The annual dividend payment has increased by 9.60% per year over the past decade, which is higher than the growth in EPS. This was mostly possible due to the expansion in the dividend payout ratio over the past decade. The company did end a 35-year streak of consecutive dividend increases in 2009, by keeping distributions unchanged. However, it resumed dividend growth in the following year.

Currently, the stock is overvalued, as it trades at a forward P/E of 22.70 and a current yield of 2.30%. I would consider initiating a position in the stock on dips into the $81-$82 area. If stock drops further, that would be perfect. Another alternative I explored was selling a January 2016 put at a strike of $90. If exercised, the effective price would be somewhere around $83/share, which would be equivalent to a P/E below 20 and a yield above 2.50%. I ended up selling the put option, and reinvesting the premium proceeds into other dividend paying stocks.

Check the full analysis at Seeking Alpha

Full Disclosure: Long NSRGY and MDLZ and a put on HSY

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