Hershey's Dividend Yield and Valuation - Hershey's current dividend yield of 3.2% is near its highest level ever, significantly higher than the S&P 500's 1.2% and the average consumer staples company's 2.5% [1] - The stock appears historically cheap, with a 38% price decline from its peak, making it an attractive investment opportunity [7] - Over the past decade, Hershey's revenue grew at an annualized rate of 4.5%, while earnings per share increased by nearly 10% annually [7] - Management has increased the dividend at an annualized rate of 10% over the past decade, appealing to dividend growth investors [8] Challenges Facing Hershey - Cocoa prices have risen sharply due to supply-demand imbalances, leading to higher cost of goods sold inflation expected in 2025 [2][3] - The company has hedged its cocoa exposure for 2024, but these hedges will eventually roll off, exposing it to future price volatility [2] - The popularity of new weight loss drugs, which suppress appetite and promote healthier eating, poses a long-term threat to Hershey's top line [4] - These challenges have contributed to a selling mood among investors [5] Potential Mitigating Factors - Hershey has a history of managing commodity price volatility and is likely to adjust by increasing prices [9] - The company believes cocoa prices will normalize, with a potential surplus expected in 2025, though the market dislocation may take time to resolve [9] - The long-term impact of weight loss drugs may be limited, as studies show only about 50% of people adhere to long-term medication regimens [10] - Early-stage adverse effects of weight loss drugs, such as muscle loss, could limit their widespread adoption [11] Investment Opportunity - The current market sentiment presents a buying opportunity for long-term investors, as Hershey's challenges may be temporary and less severe than feared [12][13] - The company's strong historical performance and attractive dividend yield make it a compelling choice for dividend growth investors [13]

Hershey's Financial Performance - The company's adjusted gross margin contracted by 460 basis points to 40.3% in Q3 2024, driven by increased commodity costs, unfavorable timing of input costs, fixed cost deleverage, and negative product mix [2] - Adjusted operating profit declined 13.2% YoY to $654 million, with the operating profit margin contracting 300 basis points to 21.9% [18] - Net sales declined 1.4% in Q3 2024, with price increases partially offset by volume declines [21] - Adjusted EPS fell 10% in Q3 2024 due to lower sales and declining gross margins [21] Hershey's Market Challenges - The company faces historically high cocoa prices and a budget-conscious consumer base, leading to softer snacking consumption in Q3 2024 [9] - Consumer behavior has shifted towards value-seeking, reducing foot traffic to convenience and drug stores where Hershey's brands are over-indexed [9] - Shopping shifts to club, dollar, and online channels, where the company's products are less developed, are further complicating matters [22] - Increased competition across all product segments is adding to the company's challenges [22] Hershey's 2024 Outlook - The company expects its 2024 adjusted gross margin to decline nearly 250 basis points due to reduced volume outlook, persistent channel and product mix challenges, and inflation impact on key ingredients [7][17] - Hershey lowered its 2024 sales guidance to nearly flat YoY, down from the previous forecast of around 2% growth [15] - Full-year adjusted EPS is now projected to decline by mid-single digits, a revision from the earlier outlook of only a slight decline [15] Industry Comparison - Hershey's stock has declined 11.8% over the past three months, compared to the industry's decline of 9.3% [5] - The company currently carries a Zacks Rank 5 (Strong Sell) [12] Alternative Consumer Staples Stocks - Ingredion Incorporated (INGR) carries a Zacks Rank 2 (Buy) and has a trailing four-quarter earnings surprise of 9.5% on average [8][13] - Freshpet (FRPT) carries a Zacks Rank 2 and has a trailing four-quarter earnings surprise of 144.5% on average [19] - US Foods Holding Corp (USFD) carries a Zacks Rank 2 and has a Zacks Consensus Estimate for current fiscal-year sales and earnings growth of 6.4% and 18.6%, respectively [14][16][20]

Company Overview - Hershey is an iconic consumer staples company known for its confectionery treats, with a historically high dividend yield of 3.2% today, suggesting the stock is attractively priced [6] - The company has a strong relationship with The Hershey Trust, which controls all of Hershey's super-voting class B stock, ensuring the company remains standalone and focused on long-term growth [1][4] - Hershey has a proven track record of creating significant wealth for investors, with a $10,000 investment in 1980 now worth around $1.6 million [4] Market and Industry Challenges - The company faces pressure from a surge in cocoa prices, a key ingredient in chocolate, which may lead to a period of relatively weak financial performance [7] - Investors are concerned about the potential impact of new weight loss drugs on consumer staples companies that produce sugary snacks, though chocolate's low-cost indulgence factor may mitigate this risk [2] Strategic Initiatives - Hershey is diversifying its product portfolio by expanding into non-chocolate sweets and salty snacks like popcorn and pretzels [8] - The company is also focusing on geographical expansion by introducing its biggest brands in foreign markets, which could pave the way for smaller brands in the future [5] Investment Perspective - Hershey's stock has lost around a third of its value since hitting all-time highs in 2023, making its dividend yield historically high [3][4] - The Hershey Trust's vested interest in the company's success ensures a focus on reliable dividend growth, aligning with the goals of dividend investors [4] - Despite current risks, the historically high yield and long-term success of the company make Hershey an attractive option for investors looking to build a seven-figure portfolio [12]

Investment Strategy - Prefers fundamental analysis over technical analysis, focusing on actual company results rather than price movements [1] - Mainly invests in stocks and ETFs, with a preference for US companies but also analyzes European and Chinese companies [1] - Takes a long-term view on investments, often adopting a contrarian approach [1] Sector Focus - Highly interested in the banking sector, believing it is fundamental to understanding the health of an economy [1] - Also interested in Macroeconomics [1]

Group 1: Mondelez's Actions - Mondelez announced a new share buyback program, authorizing up to $9 billion in purchases of its common stock, starting January 1 and lasting until December 31, 2027, which is larger than the previous $6 billion program [1] - The company declared a quarterly dividend of $0.47 per share, matching its predecessor [1] - Mondelez's strategy indicates a focus on smaller acquisitions rather than pursuing large targets like Hershey, as it aims to allocate capital towards bolt-on assets [14] Group 2: Hershey's Market Position - Hershey's market capitalization stands at nearly $34.5 billion, reflecting its strong brand recognition among U.S. consumers despite recent challenges [3] - The company faced a 1% year-over-year sales decline to just under $3 billion, with net income dropping over 12% to $446 million in its most recent quarter [18] - Hershey's controlling shareholder, the Hershey Trust, rejected a recent acquisition bid, indicating a reluctance to sell the company [9][11] Group 3: Industry Challenges - The chocolate and confectionery industry is facing challenges due to high cocoa prices and a trend towards healthier eating among consumers [17] - The popularity of GLP-1 weight loss drugs is also impacting demand for sweet treats, contributing to Hershey's sales slump [18]

Hershey's Ownership Structure and Control - Hershey Trust Company maintains control over Hershey Company, regardless of how many shares an investor buys [2] - Hershey has Class A shares (200 million, publicly traded) and Class B shares (55 million, not publicly traded) [5][6] - Class B shares hold 10 votes each, giving Hershey Trust Company control over the company [6] Mondelez's Takeover Attempt - Mondelez approached Hershey with a takeover offer, causing Hershey's stock to soar on Dec 9 [3] - This was Mondelez's second attempt after a failed $23 billion bid in 2016 [3] - Hershey rejected the offer again, likely due to lack of approval from Hershey Trust Company [4][7] Hershey's Current Challenges - Hershey faces an unprecedented spike in cocoa prices, a major input cost [10] - Demand headwinds include the impact of weight-loss drugs on consumer behavior and competition from upstart candy brands [11] - Despite challenges, Hershey remains a strong brand with $11 billion in annual sales and $1.8 billion in net income [11] Shareholder Implications - Mondelez shareholders may benefit from the deal not materializing, as large mergers are complex and costly [8] - Hershey shareholders benefit from the long-term vision maintained by Hershey Trust Company [9][12] - Hershey Trust Company's unique ownership structure ensures the company's continuity and long-term focus [12] Mondelez's Strategic Shift - Mondelez announced a $9 billion stock buyback plan and a focus on smaller, bolt-on acquisitions on Dec 11 [9]

Core Viewpoint - Hershey Co. shares rallied due to a potential takeover bid from Mondelez International, which was ultimately rejected by Hershey's management as the valuation was deemed "too low" [1][2][3]. Group 1: Takeover Bid Details - Mondelez International made a takeover bid for Hershey, but the exact size of the offer is not disclosed. However, market reactions suggest a bid around $208 per share, which would imply a market capitalization of approximately $39 billion [4][5]. - Hershey's management rejected the offer, believing it undervalued the company, especially considering its historical market capitalization of over $56 billion [5][6]. Group 2: Market Position and Analyst Opinions - Hershey's stock is projected to have significant upside potential, with a 12-month price forecast averaging $185.17, indicating a potential increase of 1.18% from current levels [8]. - Analysts previously estimated a price target of up to $265 per share in April 2023, but current targets have declined, raising questions about the reasons behind this shift [9]. - Hershey's gross margins are reported at 44.5%, indicating strong pricing power and a competitive advantage in the market [10]. Group 3: Financial Performance and Institutional Confidence - The company has a return on invested capital (ROIC) rate of up to 25%, suggesting effective capital retention and reinvestment strategies [11]. - Over the past 24 years, Hershey has outperformed the S&P 500 by 200%, highlighting its strong historical performance despite recent declines [12]. - As of November 2024, State Street increased its holdings in Hershey by 5.8%, reflecting confidence in the stock's value, with net positions reaching $1.3 billion [13].

Group 1 - Hershey shares declined as traders reacted to news indicating a lower likelihood of a merger with Mondelēz International [1][4] - Mondelēz announced a focus on acquiring brands that are easier to integrate, alongside a stock buyback plan [2][3] - Hershey previously rejected a low acquisition offer from Mondelēz, which had attempted a takeover in 2016 [3][4] Group 2 - Following the news, Hershey's shares fell approximately 3%, while Mondelēz shares increased by a similar percentage [4]

Core Insights - The Hershey Company (HSY) has experienced an 11% decline in stock over the past three months, underperforming the broader industry and the Zacks Consumer Staples sector, while the S&P 500 increased by 6.2% during the same period [1][3]. Group 1: Consumer Trends and Market Challenges - Hershey is facing a challenging environment due to historically high cocoa prices and a budget-conscious consumer base, leading to a decline in total snacking consumption as consumers prioritize value [3][4]. - Shifts in shopping behavior towards club, dollar, and online channels, where Hershey's products are less developed, are complicating the company's market position [4]. - The company's third-quarter net sales fell by 1.4%, driven by soft consumption trends, reduced retailer inventories, and seasonal shipment delays [5]. Group 2: Financial Performance and Margin Pressure - Hershey's adjusted gross margin contracted to 40.3%, a decrease of 460 basis points, due to increased commodity costs and unfavorable timing of input costs [6]. - The adjusted operating profit fell by 13.2% to $654 million, with the operating profit margin contracting by 300 basis points to 21.9% [6]. - Management anticipates a decline in the 2024 adjusted gross margin by nearly 250 basis points, influenced by reduced volume outlook and persistent inflation on key ingredients [7]. Group 3: Revised Guidance and Future Outlook - Hershey has lowered its 2024 sales guidance to nearly flat year-over-year, down from a previous forecast of around 2% growth, due to competitive pressures and lower-than-expected retailer inventory levels [8]. - The company now projects a mid-single-digit decline in full-year adjusted EPS, a revision from an earlier outlook that anticipated only a slight decline [9].

Group 1: Sugar Consumption and Market Impact - Americans consume about 17 teaspoons of added sugar daily, exceeding the recommended amount by five teaspoons [1] - The high sugar intake benefits companies that produce sugary products, allowing them to pay substantial dividends to investors [2] Group 2: Coca-Cola Overview - Coca-Cola is a leading global beverage company known for its sweetened soft drinks and other beverage brands [3] - The company has increased its dividend payment for 62 consecutive years, qualifying it as a Dividend King [4] - Coca-Cola paid $8 billion in dividends last year and has distributed over $80 billion to shareholders since 2010 [4] Group 3: Coca-Cola Financial Performance - Coca-Cola's current dividend yield is approximately 3%, significantly higher than the S&P 500's yield of around 1.2% [5] - The company expects organic revenue growth of 4% to 6% annually, which should drive 7% to 9% annual earnings-per-share growth in the long term [6] Group 4: Hershey Overview - Hershey is the top confectioner in the U.S. and the second-largest player in the snacking industry, with well-known brands like Hershey's and Reese's [7] - Hershey's dividend yield is also over 3%, and it has increased its dividend for 15 consecutive years, growing at more than 10% annually over the past decade [8] Group 5: Hershey Growth Strategy - Hershey targets 2% to 4% annual net sales growth and 6% to 8% adjusted earnings-per-share growth in the long term [8] - The company is investing in innovative product development and pursuing acquisitions, such as the recent acquisition of Sour Strips, to enhance its product portfolio [9] Group 6: Investment Appeal - Both Coca-Cola and Hershey generate significant revenue from sugar products, enabling them to provide attractive dividends [10] - Their strong track records of dividend growth suggest continued appeal for investors seeking passive income [10]