Why Hershey Should Handle High Cocoa Prices Just Fine

Hershey (NYSE: HSY) is struggling today. One of the biggest problems is inflation, but not the kind that consumers dealt with coming out of the coronavirus pandemic. Cocoa prices are sky-high thanks to some unique dynamics in the cocoa market.

Here's why cocoa prices are a near-term issue, but are highly unlikely to derail Hershey over the long term.

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What's happened to Hershey?

Hershey's stock price has plunged more than 45% from the highs it reached in 2023. That's a painful drawdown, but it has pushed the dividend yield up to historically high levels at 3.66%. Long-term dividend investors will likely find this consumer staples icon of extreme interest based on this fact.

The massive drop in the stock price is being heavily driven by the huge price increase in cocoa, one of Hershey's most important ingredients. This isn't typical inflation, however. There are systemic factors within the cocoa market that have all come together into something of a perfect storm. Underinvestment, old cocoa trees, bad weather, and diseases are impacting production. And then there's the investor speculation that's making the price issue even worse because it has increased volatility in the cocoa market.

This is going to be a problem for Hershey. That said, management has, so far, avoided the worst of the pain because of the hedges it had in place. Those hedges are going to start rolling off and, thus, 2025 is probably going to be a bad year for the company's chocolate business. There's no way to sugarcoat any of this.

Long-term dividend investors have a friend at Hershey

Hershey is used to dealing with commodity price swings. That's just normal for a consumer staples company. So it will do what it has to do in order to adjust, which basically means passing its rising costs on to consumers. That process may take some time, which will mean near-term pressure on margins, but consumers will eventually grow accustomed to higher candy costs. It helps that chocolate is an affordable indulgence and one that consumers love dearly.

The thing is, Wall Street tends to have a short-term mentality and the cocoa problem could require years to fully resolve. And, thus, you get Hershey's huge price decline. But there's a wildcard that investors need to know about: The Hershey Trust.

The Hershey Trust is a philanthropic organization that controls nearly all of Hershey's class B shares. The B shares have super-voting powers, so The Hershey Trust effectively controls Hershey the company, if it wants to. For example, The Hershey Trust has stepped in to scuttle takeover attempts, preferring that Hershey remain a stand-alone company.

There are two notable benefits for regular investors when it comes to The Hershey Trust. The Trust uses the dividends it collects from Hershey to fund its philanthropic efforts. Thus, it has a vested interest in seeing Hershey support its dividend and in ensuring that the company provides steady growth over time. That's basically what most dividend investors will want, too.

The second benefit is particularly important right now. Because The Hershey Trust is by definition a long-term investor, it is more than happy to give management the time and leeway to deal with the difficult periods that every business experiences. So long as management is doing the right things, the Trust will most likely support the management team. This means that Hershey can actually do the "right" things and not the "most expedient" things because it isn't trying to appease historically fickle Wall Street.

There's no particular need to worry about Hershey

If you are a dividend investor and you think in decades, not days, there's no reason to be unduly worried about cocoa prices. Hershey will deal with it. It may take some time, but the solution doesn't require rocket science to figure out (raising prices is a normal tactic in the food industry). What Hershey needs is the time to work through the issue and, as it happens, that's exactly what The Hershey Trust affords the company. While Wall Street is focused on the near term, long-term investors have a buying opportunity with this iconic, and fairly uniquely situated, food company.

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Reuben Gregg Brewer has positions in Hershey. The Motley Fool has positions in and recommends Hershey. The Motley Fool has a disclosure policy.