Hershey(NYSE: HSY) is in the headlines because Mondelez(NASDAQ: MDLZ) is rumored to have made (another) offer to buy the company. Hershey stock rose sharply on that news, but don’t get your hopes up. Still, there are a few good reasons to buy the stock anyway. Here’s what you need to know.
It isn’t shocking that Mondelez’s name would come up with regard to acquiring Hershey. In fact, Mondelez has made an offer before, back in 2016. The problem here is that The Hershey Foundation, a not-for-profit organization, controls virtually all of the voting power at Hershey thanks to the super voting B shares it owns. Basically, unless a potential suitor can convince The Hershey Trust to consent to an acquisition there’s not likely to be a deal. And even then it might not happen because the marriage would bring together two of the world’s largest confection makers.
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This is bad news if you buy Hershey expecting a quick payday. But it is good news if you want to own a well-run dividend-paying company for the long term. And, perhaps more notably, The Hershey Trust’s goals are really pretty closely aligned with those that an income investor would have. Basically, the trust uses the dividends it collects to fund its philanthropic efforts. So it wants a slow and steadily growing dividend from a business that is financially strong and can be counted on for the long term. Investors that think short term might view The Hershey Trust as a bad thing, but if you think in decades and not days, it is really a big reason to consider buying Hershey.
Mondelez’s rumored offer to buy Hershey brings with it another big positive for long-term investors. Simply put, Mondelez is likely interested because Hershey’s stock looks attractively priced. Even after a big stock price bounce on the takeover rumor, the shares are still roughly 30% below their recent high-water mark. In other words, Hershey remains on sale. The dividend yield of 3.1% is notably high for the company, which backs up the idea that the stock is on the sale rack.
There are reasons for the weak stock price, of course. For example, Wall Street is concerned that new weight loss drugs will reduce demand for sweets and snacks. Then there’s the shocking rise in the price of cocoa, a key ingredient in making chocolate. That will be a profit headwind, but it is a commodity product, so there’s every reason to believe that Hershey will see lower prices in the future. And if not, the cost of chocolate is low enough that, eventually, higher prices can be pushed through to offset the cocoa price rise.
In other words, Mondelez is trying to make an opportunistic acquisition. You might want to buy Hershey for the same reason.
The last reason to like Hershey is that it is growing its food business. It is a giant in the U.S. chocolate market, so there’s probably not a huge amount of growth there. However, it is expanding the portfolio of sweets it sells, so even in the convection space there’s more room for advancement.
That said, Hershey isn’t a major player in foreign markets. It is working on introducing its biggest brands around the globe. Assuming it can get people eating those candies, it will then have a stronger “in” with customers and retailers to start introducing some of its smaller brands. So there’s international expansion potential.
In addition to sweets, Hershey has been building its salty snack collection. The current list includes pretzels, popcorn, and extruded snacks. The effort hasn’t been a resounding success, with popcorn sales recently being a bit weak, but there has been enough success that Hershey isn’t giving up on this diversification play. Assuming it continues to move forward, with reasonable success, Hershey will be a much more attractive way to invest in the snacking subcategory of the consumer staples space.
There is a reason why Mondelez is sniffing around Hershey, assuming the rumors are true. Quite simply, it is because Hershey is an attractive investment right now. The stock looks historically cheap and, despite some headwinds, management continues to run the business well. That said, just because Mondelez will have a hard time buying Hershey, thanks to The Hershey Trust’s involvement, that doesn’t mean you shouldn’t buy it. In fact, The Hershey Trust is just one more reason for long-term dividend investors to like Hershey stock.
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