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Hershey’s Capital Allocations for Capacity Expansion and Innovations

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Hershey’s capital expenditure

The Hershey Company (HSY) leads the US confectionery industry (XLP) (IYK), with a capital expenditure (as a percentage of sales) that has continued to increase since fiscal 2012.

As the above graph shows, Hershey’s capex was 4.7% of its sales in 2013. Mondelez International (MDLZ) and Nestle (NSRGY), by comparison, had capex-to-sales ratios of 4.8% and 4.3%, respectively. As of October 19, 2014, Mondelez and Nestle were considered large-cap companies, with market caps of $73.9 billion and $247.1 billion, respectively.

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Hershey reported revenues of $7.4 billion in fiscal 2014, compared to Nestle’s revenue of 91.9 billion. But Hershey is mainly into confectionery, whereas Nestle produces baby food, bottled water, confectionery, breakfast cereals, coffee and tea, dairy products, ice cream, frozen food, pet food and snacks.

Hershey’s spending plans

At Hershey, capital expenditures are mainly used to support capacity expansion, innovation, and cost savings. The company also includes capitalized software additions to enhance information system. Its capital expenditures were ~$345.9 million, $323 million, and $258.7 million in fiscal 2014, 2013, and 2012, respectively.

The company’s fiscal 2014 capex included costs of $115 million to construct a confectionery manufacturing plant at Malaysia. Its capital expenditures in fiscal 2013 and 2012 included $11.8 million and $74.7 million, respectively, related to its Next Century program. You can read more on Next Century program in Part 6 of this series.

Hershey expects to incur a $375–$400 million capex in fiscal 2015, including $90–$110 million for the Malaysia plant.

Capital productivity

Hershey saw a ROIC (return on capital employed) ratio of 24.8% in fiscal 2014, compared to the 26.7% it had in fiscal 2013. Hershey’s ROIC is higher than its close competitors. In fiscal 2014, Mondelez and Nestle had a ROIC of 5.6% and 18.9%, respectively.

But how well has the Hershey Company been rewarding its shareholders with dividends? Continue to the next part of this series to find out.

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