China is Growing Richer and They Love Spam
Jonathan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
For the second quarter, the gross domestic product of China grew at a rate of 7.6 percent. While lower than the average of 10 percent previously and the slowest pace in three years, the economy of China is still expanding and its people are growing more affluent, as a result. That is bullish for Hormel (NYSE: HRL), the maker of Spam and other products that sell well in China, Asia and emerging markets around the world.
Hormel has been dedicated to China for almost two decades. From the company website, "Beijing Hormel Foods Co. Ltd. (BHFC) began in 1994 with Beijing General Corporation of Agriculture, Industry and Commerce as a joint venture partner. BHFC opened a state-of-the-art plant in 1998 for the harvesting, manufacturing, sales, marketing and distribution of chilled processed meat products and convenience foods. Hormel Foods maintains a majority interest in this joint venture. The following year, Hormel Foods established a joint venture with Da-Chang Further Processing Meat Company to form Shanghai Hormel Foods Co. Ltd. This company manufactures, sells, markets and distributes chilled processed meats for sale in the Shanghai, Guangzhou and Shenzhen regions of China. HFIC holds a majority interest in this joint venture. The plant in Shanghai opened in 1997. SHFC was named one of the 10 best employers in China and one of 20 best in Asia in 2001."
Hormel also has substantial operations in other parts of Asia such as Japan, South Korea and the Philippines. This growth in emerging markets will continue as the middle class expands. According to a recent report from The McKinsey Global Institute of McKinsey & Co., the consulting behemoth, "Urban world: Cities and the rise of the consumer class," by 2025, "One billion people will enter the global consuming class..."
Like Yum! Brands (NYSE: YUM), Burger King and McDonald's (NYSE: MCD), Hormel has prospered in China and throughout Asia by adapting its menu to local tastes to sell to the expanding "global consuming class." For Yum! Brands, the operator of KFC and Pizza Huts, as detailed from the company website, this entails "In addition to Original Recipe chicken, KFC has an extensive menu featuring beef, seafood, rice dishes, fresh vegetables, soups, breakfast, desserts, and other products that appeal to Chinese consumers’ tastes. "
And while the Golden Arches are still the same, the McDonald's menu in China and other parts of Asia feature the Shogun Burger (China), Green Tea and Red Bean sundae (Hong Kong), Samuria Pork Burger (Thailand), and McRice (Singapore).
Burger King restaurants in Tokyo actually have Spam burgers on the menu, in an adaptation to the local desires. In Japan, Spam is also served atop rice and bundled with seaweed as "Spam Musubi." Burger King recently announced that it will open 1,000 restaurants in China.
Kraft Foods (NASDAQ: KRFT) and General Mills (NYSE: GIS) have also modified products to appeal to the taste of Chinese consumers. The Oreo cookies from Kraft Foods sold in China are smaller, not as sweet and come with a green tea filling. General Mills offers its Haagan-Dazs ice cream in popular local flavors such as Green Tea Hibiscus to sell well in China, too. Due to the tainted-food scandals in China, many consumers in the People's Republic prefer foreign foods so conforming to the local tastes allows for a premium pricing strategy featuring familiar flavors.
Hormel's success in China has come from positioning Spam as a "premium product" like items from Kraft and General Mills. Pork has long been a staple in China. In addition, Hormel provides pork sausages and pepperoni for the Pizza Hut outlets of Yum! Brands in China. As a result, revenues from Spam products in Asia have more than doubled.
For the premium product contrast, Hormel Foods International President Rick Bross describes Spam as a, "juicy meaty sensation."
While the appeal of Spam is a matter of individual taste, there is no denying the beefy dividend income history of Hormel Foods. Hormel has paid a dividend, now yielding around 2.08%, since 1928; and increased it for 46 consecutive years. The dividend payout ratio, the earnings going to paying the dividend, is low for Hormel Foods at just 31%. The historic payout ratio for a company on the Standard & Poor's 500 Index is around 50%.
General Mills and Kraft, other consumer giants, have similar dividend frameworks. General Mills pays a 3.38% dividend with a 51% payout ratio. Kraft Foods offers dividend income of 2.9% from a 59% dividend payout ratio. While the dividend of Hormel Foods is lower, it has ample cash flow to continues its almost half century of dividend growth. In addition, Hormel Foods is virtually debt-free.
Due to the rising price of corn which has cut into margins, Hormel Foods is down in recent trading. Long term investors should look upon dips in the price of Hormel as an opportunity to buy the stock at a lower cost basis with a higher dividend yield. With a beta of just 0.43, there is not a whole lot in the way of fluctuating for the share price of Hormel. Increasing the dividend 46 years in a row, however, shows that there is only one way that the yield eventually goes and that is higher.
jonathanyates13 has no positions in the stocks mentioned above. The Motley Fool owns shares of McDonald's. Motley Fool newsletter services recommend McDonald's and Yum! Brands. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.