Forget Coca-Cola: Buy This Magnificent Consumer Staples Stock Instead

There are a lot of things to like about Coca-Cola‘s (NYSE: KO) stock, not the least of which are its status as a Dividend King and its well-above-market 3% dividend yield.

But it isn’t the only high-yield consumer staples stock you can buy that is a Dividend King. In fact, if you can handle contrarian investing, deeply out-of-favor Hormel Foods (NYSE: HRL) is probably a better option.

Coca-Cola is just OK

At its core, Coca-Cola sells flavored water, which is a pretty impressive thing when you consider the iconic nature of the company’s namesake product.

It has also proved its worth to dividend investors many times over, given the 61 consecutive years of annual payout increases it has put up. That makes it a highly elite Dividend King. You simply don’t achieve a dividend record like that without doing something right, and consistently so.

A person looking at a stock trading phone app.

Image source: Getty Images.

But don’t be fooled by the 3% dividend yield. While that is twice what you would get from an S&P 500 index fund, it is only about middle of the road for Coca-Cola over the past decade or so.

And while key valuation metrics, like the price-to-sales (P/S) and price-to-earnings (P/E) ratios, are below their five-year averages, they aren’t dramatically out of line historically. All in, Coca-Cola looks like it is trading at a reasonable price, not at a deep value.

Another option for investors looking at the consumer staples space is Hormel Foods, which is not getting a lot of love on Wall Street these days.

Hormel is facing hard times

To offer some key comparison points, Hormel is also a Dividend King with 57 consecutive years of annual dividend increases behind it. So it stands toe to toe with Coca-Cola there.

But it has a higher yield at 3.6%. That’s interesting on an absolute level, but there’s an important thing to consider: In recent history, Hormel’s yield has never been higher than it is right now. That suggests that Hormel is trading at deeply depressed prices, unlike Coca-Cola. That’s backed up by notably below-average valuation metrics.

HRL Dividend Yield ChartHRL Dividend Yield Chart

HRL Dividend Yield Chart

There are reasons why investors are so downbeat on Hormel. For example, it hasn’t been as successful as its peers at passing inflation-driven price increases on to customers. Avian flu has been a headwind to the company’s turkey operations for a couple of years. The recent Planters acquisition has come at a time when the nut segment has been weak.

And growth in China hasn’t lived up to expectations as the country moved past COVID-19-related lockdowns.

Hormel isn’t the only company facing these types of issues, but it is probably the only one facing them all at the same time. That said, if you look at each problem individually, none of the headwinds is likely to be permanent. They all just require some time to work through.

Given the company’s impressive history, highlighted by its status as a Dividend King, it seems very likely that it will muddle through all of this. And assuming that happens, Wall Street will likely reward the stock with a higher valuation.

Hormel is for contrarians and value investors

It’s not like it would be a disastrous mistake to buy Coca-Cola. It’s a well-run company that seems fairly valued today — and maybe even a little cheap.

But if you prefer to buy your stocks when everyone else is selling, Hormel has more going for it, including an equally strong track record as a business, a higher absolute yield, and a higher historical yield. If you are a contrarian or are focused on value, Hormel is likely to be the better pick for your portfolio.

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Reuben Gregg Brewer has positions in Hormel Foods. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Forget Coca-Cola: Buy This Magnificent Consumer Staples Stock Instead was originally published by The Motley Fool

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