Should investors be bullish on Hershey stock?

He owns shares in The Hershey Company (HSY 0.86%) it has been a bitter taste for the last few months. Rising cocoa prices and lower appetite for chocolate have left inventories limited and the share price has fallen slightly from last year’s levels.

However, consumption patterns can evolve in cycles, and the stock’s P/E ratio is near multi-year lows. Does this mean investors should view Hershey as a buying opportunity?

Hershey status today

Products like Hershey’s Milk Chocolate Bar and Hershey’s Kisses have made the company a mainstay of the American consumer industry for more than 125 years. As a food stock that has traded since 1927, its approximately 90 brands have created wealth for many generations of investors.

However, the company’s investors would probably prefer to forget the first half of 2024, as rising cocoa prices have coincided with reduced consumer spending. As a result, Hershey’s revenue for the first half of 2024 of $5.3 billion fell 3%. This was mainly due to a massive drop in sales in the second quarter, when sales fell 17% from year-ago levels.

A slight decrease in cost of goods sold mitigated the decline in sales. However, net income of $978 million for the first two quarters of 2024 was down 2% from year-ago levels.

Furthermore, Hershey expects these conditions to continue. The company forecasts a 2% annual reduction in net sales growth and a 1% to 3% decline in earnings per share growth in 2024.

Given that performance, it might surprise investors that Hershey’s stock is down just 7% over the past year. Because it also underperformed S&P 500 in the last five years, they may not see much opportunity in the stock from that point of view.

Why Some Investors May Consider Hershey Stock

However, despite its recent performance, some investors may find opportunity in this stock. Of course, Hershey’s 97-year trading history on the stock market makes Hershey the definition of a mature company, and growth investors aren’t likely to buy the stock.

However, it trades at a P/E ratio of 22, significantly below the five-year average of 26. Also, in the 21st century, earnings multiples have risen from this level several times, indicating that Hershey’s stock is likely to move higher as business conditions improve. Such conditions indicate that the decline is more likely a cyclical pullback than an indication of long-term problems for the business.

Furthermore, investors should take a closer look at the company’s dividend. The payout, which has increased annually since 2010, pays shareholders $5.48 per share annually. That translates to a dividend yield of nearly 2.8%, more than double the S&P 500 average of 1.3%.

Also, the dividend looks sustainable. The company’s free cash flow was about $551 million, which covered dividend costs of $544 million, albeit just barely.

Still, in 2023, free cash flow of about $1.55 billion covered dividend costs of $889 million, indicating that Hershey can pay dividends while reinvesting in the company or buying back shares. Such performance should ensure long-term stability, even if the company works through periodic slowdowns.

Should I Buy Hershey Stock?

Finally, investors should consider buying Hershey stock, but only for income investing.

Indeed, the recent slowdown is likely temporary, and the lower P/E ratio looks like a buying opportunity. Also, the dividend yield is well above market averages.

Still, the stock has underperformed the S&P 500 over the past five years, even when accounting for dividends. Furthermore, chocolate is a competitive industry. Thus, it must rely on the strength of its branding to maintain and increase sales.

Furthermore, Hershey has limited opportunities for expansion, meaning population growth and inflation could be the main drivers for higher net sales. This will in turn limit opportunities for investors, making dividends the most apparent benefit to owning these stocks.