Exercise caution if you’re over-focused on Hershey’s sweet-looking distributions.
Confectionary king Hershey (HSY 0.86%) offers sweet treats for junk-food aficionados and quarterly distributions for income collectors. However, chasing yield with Hershey stock might end up being bad for your financial health.
On one hand, Hershey is a well-known and long-established consumer-staples company that has been profitable for many years. On the other hand, while Hershey will almost certainly pay decent dividends this year, there’s no guarantee that the sugar high of Hershey’s yield hikes will last.
The big “if”
If you’re an income investor, it’s easy to become complacent when a company has consistently raised its dividend for many years, as Hershey has done. Bear in mind, though, that past performance is never a guarantee of future returns.
Hershey currently pays a quarterly dividend of $1.37 per share, which would equate to $5.48 per share over the next year. But that’s only “if” Hershey continues to pay at least $1.37 per share, which is certainly not guaranteed.
Hershey recently experienced its first quarterly earnings-per-share (EPS) miss in a while when it reported $1.27 per share in actual Q2 earnings versus $1.44 in expected earnings. Moreover, the company’s earnings declined 36.8% year over year, with CEO Michele Buck citing “consumers pulling back on discretionary spending.”
Minding the payout ratio
Hershey shares have been choppy and are down over the past year. However, at least the company’s shareholders can enjoy decent distributions as it offers a 2.68% forward annual dividend yield versus the average yield of about 2.13% for the consumer-defensive sector.
However, Hershey’s dividend payout ratio (the portion of its earnings paid out in dividend distributions) for the past year was $5.30, or about 59% of its $8.96 in earnings per share. It may be a red flag when a company’s payout ratio exceeds 50%. Granted, Hershey’s 59% payout ratio is only a little high, but it’s a metric worth monitoring.
More immediately significant, perhaps, is Hershey’s earnings decline. So don’t be in a rush to chase yield with Hershey — or any stock.
David Moadel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Hershey. The Motley Fool has a disclosure policy.
