1 Great S&P 500 Dividend Stock to Create Lasting Generational Wealth for Your Children

Is home to the ninth lowest beta in the world S&P 500 Index Index, snack giant Hershey Company (NYSE:HSY) Dispelling the notion that “safe” stocks can’t produce life-changing returns. While its 0.34 beta (a measure of how much a company’s stock price moves relative to the broader market) means operations are extremely stable, Hershey’s total returns have tripled those of the S&P 500 since 2000.

However, a rare combination of challenges last year caused Hershey’s stock price to drop 30% from its 52-week high.

Despite these difficulties, the company’s kid-friendly operations and simple business model make it a worthy entry stock, which is why I’ve been happily buying it Hershey Stocks in My Daughter’s Portfolio over the past few months.

That’s why I still think Hershey has overcome these obstacles and is poised to create lasting generational wealth in any kid’s portfolio.

Why Hershey will overcome current headwinds

Currently, Hershey’s operations face two short-term and two long-term problems:

short term pain

Cocoa prices doubled last year alone due to heavy rains in West Africa.

Cocoa price chart

Cocoa price chart

Meanwhile, sugar prices are rising faster than the rate of inflation. Higher prices for both ingredients have combined to impact Hershey’s candy business, which accounts for more than 80% of the company’s sales.

Huge capital expenditures related to integrating a new enterprise resource planning system and increasing production capacity by 25% further affected the company’s prospects.

HSY CapEx to Revenue (TTM) ChartHSY CapEx to Revenue (TTM) Chart

HSY CapEx to Revenue (TTM) Chart

Given Hershey’s capital expenditures are at their highest this century and key ingredient prices are rising, it would be reasonable to expect Hershey’s profitability to decline significantly, but its net and free cash flow margins have proven resilient, at as much as 17% last year.

While management expects earnings per share (EPS) to remain flat in the coming year, these prices and capital expenditures should trend downward over the long term, providing patient investors with an excellent rebound catalyst.

A long-term, existential threat?

Beyond these short-term complications, the growing popularity of Mr. Beast’s Feast and the rise of GLP-1 diet pills continue to cause concerns about Hershey’s long-term success.

YouTuber Jimmy Donaldson (Mr. Beast) expects sales of his Feastables chocolate bars to exceed $500 million by 2024, and there’s no doubt that his 200 million subscribers could pose a significant threat to Hershey’s. However, even if Feastables hits that target, it would still fall short of 5% of Hershey’s sales last year.

Additionally, Segmanta recently conducted a survey on the snacking habits of Gen Z (Mr. Beast’s target audience), naming KitKat, Hershey’s and Reese’s (all Hershey’s brands) as their favorite chocolate brands.

As for the strong demand for GLP-1 drugs, it’s too early to tell the impact of these weight-loss drugs.However, there is a counter-argument that these drugs May encourage contractionary inflationhelping Hershey’s profits when customers seek smaller portions.

Despite these headwinds, Hershey’s sales and earnings per share grew 7% and 13%, respectively, in 2023, while dividend payments increased 15%, highlighting the pricing power of the business. Despite the solid performance, which is best for potential investors during tough times, the company is now trading at its most attractive valuation in more than five years.

A man stood in front of a white wall and took a bite of candy.A man stood in front of a white wall and took a bite of candy.

Image source: Getty Images.

Hershey’s above-market dividend yield and below-market valuation

Hershey’s stock price is down 22% from last year, and its current price-to-earnings (P/E) ratio is 21, slightly lower than the S&P 500 average of 23. At the same time, its dividend yield of 2.5% is well above the index average of 1.5%. Taken together, these two data points are enough to argue that the company’s stock is reasonably priced, if not undervalued — especially compared to Hershey’s five-year average.

Hang Seng Price to Earnings Ratio ChartHang Seng Price to Earnings Ratio Chart

Hang Seng Price to Earnings Ratio Chart

Despite a higher-than-normal yield, the company used only 48% of its net profits in dividend payments, leaving plenty of room for extended dividend growth momentum over the next 14 years. With a 2.5% yield locked in at a below-market valuation, I would happily continue to buy Hershey stock for my daughter while I wait for the company’s capital spending to drop back to normal levels and for cocoa and sugar prices to eventually fall.

While Hershey’s won’t be the next stock in the S&P 500 to become a bull stock, I believe it will create generations of wealth for my daughter over the next few decades, just as it has done so far this century. That way.

Should you invest $1,000 in Hershey right now?

Before buying Hershey stock, consider the following factors:

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Josh Cohen-Lindquist Holds a position in Hershey. The Motley Fool recommends Hershey. The Motley Fool has disclosure policy.

1 Great S&P 500 Dividend Stock to Create Lasting Generational Wealth for Your Children Originally published by The Motley Fool

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