It’s the end February, and Valentine’s Day was on everyone’s mind. People bought candy, cards, flowers, jewelry, and clothing and ate out at restaurants. The National Retail Federation estimates consumers will spend $25.9 billion on Valentine’s Day. As a result, companies providing these products and services can make suitable investments. Moreover, they often have market leadership and scale because of industry consolidation. Consequently, they return prodigious amounts of cash to investors through dividends and share buybacks.
This article examines four dividend growth stocks for February 2023, emphasizing companies with higher sales during Valentine’s Day. Also, we require market leadership and solid dividend safety. Finally, we exclude privately held companies, like Hallmark.
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4 Dividend Growth Stocks for February 2023
The Hershey Company (HSY) is the quintessential Valentine’s Day stock. The firm sells candy and snacks globally. The leading brands are well-known. The firm sells about 100 brands, including Hershey, Kit Kat, Reese’s, Jolly Rancher, Kisses, Pirate’s Booty, Skinny Pop, etc. Besides Valentine’s Day, the firm has higher volumes around Halloween, Easter, and special events. The Milton Hershey School Trust controls the company, which has ~80% of the voting power but owns about 29% of the shares.
Hershey’s competitive advantages are its market leadership, scale, brands, and R&D. The firm has ~47% of the domestic chocolate market and 32% of the confectionary space, making it the market leader and one of the largest candy companies. Its scale and size result in manufacturing, distribution, and marketing cost efficiencies. Next, the firm invests continuously in its brands to maintain this leadership.
The company’s near-term challenges are inflation for labor, freight, and inputs and supply chain constraints. Hershey is dealing with these headwinds through price increases and cost cuts. But still, margins are down.
Despite the near-term challenges, Hershey is an excellent dividend growth stock to own. The forward dividend yield is about 2.1%. The company is a Dividend Contender with a 14-year streak of increases. The growth rate has been nearly 10% CAGR over the past decade. Moreover, the dividend safety is excellent, with a divided quality grade of ‘A+’ and a moderate payout ratio of ~45%.
A negative is Hershey’s valuation. It is trading at a valuation of 25.4 times forward earnings. But Hershey is worth looking at for long-term investors seeking dividend safety and growth and maybe taking a nibble.
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Tootsie Roll Industries (TR) is another candy company benefitting from Valentine’s Day and special events. The company is smaller than Hershey but is no less well-known. Its famous brands are Tootsie Roll, Tootsie Pops, Charms, Junior Mints, Dubble Bubble, etc. The company is controlled by Chairwoman and CEO Ellen Gordan, who owns approximately 53.9% of common stock and 82.8% of Class B shares.
The firm’s competitive advantage is the brand strength of its primary product, the Tootsie Roll, which lacks direct competition and is unique. Some of the other brands are also well-known to consumers. The firm also benefits from a fortress balance sheet with a net cash position.
The company struggled with lower sales in 2020 during the worst months of the COVID-19 pandemic. But it rebounded in 2022 as social gatherings and other events resumed, and demand surged. Inflation is another concern with high freight, labor, storage, packaging, and fuel costs. As a result, the company is raising prices, but margins and net profits have been impacted.
Tootsie Roll pays a regular cash dividend and a 3% stock dividend annually, giving it an effective dividend yield of nearly 4%. Thus, some investors consider Tootsie Roll and Dividend King.
One detraction is that Tootsie Roll trades at a price-to-earnings ratio well above its long-term average. Recent good performance combined with limited float makes the stock expensive. But Tootsie Roll is worth tracking.
Mondelez International (MDLZ) is another chocolate, confectionery, and snacking company but with more global exposure. The company was formed through acquisitions and divestments of the original Kraft Foods. Today, Mondelez sells brands like Cadbury, Milka, Toblerone, Oreo, Chips Ahoy, etc. The firm derives 32% of its sales from chocolate and 10% from gum and candy, making Valentine’s Day and special events a vital demand driver. Besides chocolate and candy, Mondelez is the global market leader in biscuits and cookies.
The firm’s competitive advantages are its size, market leadership, brands, and growth strategy. Mondelez’s size gives it cost efficiencies for marketing, distribution, and marketing. Notably, the firm is even bigger than Hershey in terms of revenue. Globally, it is No. 2 in chocolate and No. 3 in candy. The company has a significant presence in Europe, Latin America, and Asia, especially for its chocolate and candy brands. Many of its local brands are No. 1 or No. 2 in the country or region. For example, Cadbury Dairy Milk is the market leader in the UK, India, Australia, and Ireland.
Mondelez is facing similar difficulties as Hershey and Tootsie Roll. High global inflation is causing input costs to rise. Labor, freight, distribution, etc., are all priced higher than before the pandemic.
That said, Mondelez is an excellent dividend growth stock with ten years of increases, making it a Dividend Contender. The 5-year dividend growth rate is 12%+. Additionally, the dividend safety is solid, with a modest payout ratio of 50% and an ‘A’ dividend quality grade. The forward dividend yield is almost 2.4%, more than the 5-year average.
Mondelez is undervalued now with a P/E ratio of ~20.8X, below its 5-year and 10-year ranges. As Warren Buffett says, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” Investors are getting a quality stock with market leadership, nice dividend growth potential, and solid dividend safety.
The fourth and last stock on this list is Darden Restaurants (DRI). While the name Darden may not be well-known, the company’s restaurants are seemingly everywhere. Darden operates or franchises roughly 2,000 dining establishments under the Olive Garden, LongHorn Steakhouse, Cheddar’s Scratch Kitchen, Yard House, The Capital Grille Seasons 52, Bahama Breeze, Eddie V’s Prime Seafood, and Capital Burger brands.
Darden’s competitive advantages are its scale as the largest restaurant operator in the United States. This means it can spread purchasing costs over a more extensive base and often obtain better leasing deals. In addition, the well-known brands have a loyal following among consumers. Hence, the company grows by attracting diners to its restaurants and opening new locations.
On the negative side, Darden is struggling with high labor costs to attract and retain employees, impacting margins. Furthermore, inflation is a meaningful concern because the business is a relatively low-margin one.
The firm struggled during the COVID-19 pandemic as demand plunged. In response, Darden cut the dividend. But two years later, the dividend rate is higher than before the pandemic after two large increases. The forward dividend yield is now 3.3%, and dividend safety is acceptable with a payout ratio of ~63% in a business with high recurring revenue.
Darden is trading at an earnings multiple of 18.7X, at the lower end of its 5-year and 10-year range. The company beat fourth-quarter estimates with an upbeat outlook for 2023.
Disclosure: Long MDLZ
A version of this post by Dividend Power originally appeared in Investor Place and was republished with permission.
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Prakash Kolli is the founder of the Dividend Power site. He is a self-taught investor, analyst, and writer on dividend growth stocks and financial independence. His writings can be found on Seeking Alpha, InvestorPlace, Business Insider, Nasdaq, TalkMarkets, ValueWalk, The Money Show, Forbes, Yahoo Finance, and leading financial sites. In addition, he is part of the Portfolio Insight and Sure Dividend teams. He was recently in the top 1.0% and 100 (73 out of over 13,450) financial bloggers, as tracked by TipRanks (an independent analyst tracking site) for his articles on Seeking Alpha.