J.M. Smucker Added To The Portfolio

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Summary

  • I bought shares of J.M. Smucker after liking what I saw with a deeper analysis
  • The stock is trading near it’s 52 week low and at a fair value based on adjusted earnings
  • The dividend will be increased soon, ballpark may be around 8%
  • The dividend has room to grow, a current yield slightly better than the S&P

Introduction

I like to give the TL;DR (too long, didn’t read) version at the top so you can just skim if you want but of course I encourage you too read on!

I have been working on a series of articles pertaining to the big food companies.  I’ve covered Kellogg, General Mills, J.M. Smucker and soon to be Hormel.  All four companies have been trading near their 52 week lows, offer a steady business model and pay dividends.  This is an intriguing combination and had me wanting to dive deeper to see if they were worth investing in.

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Since I have been doing my own portfolio, I’ve wanted a food company.  They tend to trade at a premium due to their history of steady growth over time.  People need to eat after all.

Brands

jm smucker brand list

Smucker has a stable of brands that we all know, Jif, Smucker’s, Folgers, Pillsbury (they split products with General Mills).  In addition they sell branded Dunkin’ Donuts K-Cups and added big brands like Meow Mix and Kibbles ‘n Bits from their Big Heart Pet Brands acquisition.

The company will announce full year 2017 earnings on June 8th, 2017.  Top line growth has been virtually non-existent this year but it has tripled over the last ten years.  Big revenue spurts tend to come when the company makes an acquisition.  The acquisition of Big Heart added about $2B of annual revenue.

jm smucker revenue chart over 10 years

Earnings in the third quarter were down to $2.00 versus $2.05 in the same quarter during 2016.  For the full year the company is guiding to earnings of about $7.60 per share.  This is on an adjusted basis, not on GAAP.  I am willing to give them a pass here, this isn’t a permanent pass.  Adjusted earnings are meant to show a smoothed out ride over time rather than the lumpiness of GAAP earnings.

FAST Graphs

earnings fast graph for sjm

I have an image of that phenomenon above, the differences in the lines represent adjusted (or operating earnings) versus GAAP earnings.  On an operating basis level, the company has been compounding earnings at about a 10% annual clip for the last 20 years – talk about an investment!

So given that, here is the FAST Graph for J.M. Smucker.

13 year j m smucker earnings chart

I want to point out a few things here.  First, the company has been a great long term grower of earnings and you can visually see how the stock price meanders around like a river.  Since approximately 2013, the stock has been at a “fair value” level, or average valuation level, just twice.  It briefly touched in 2014 and then most recently now.

With the future being inherently unknowable, this gives me reassurance going forward that I am paying a fair price.  Not the best price ever, but certainly better than a lot of investors have paid over the last year.  In absolute terms, the multiple of 16 seems like a fair price for a steady eddy type of company.

Lastly, the dividend itself has been growing steady.  The time frame above doesn’t even highlight how long they have been doing it.  The company is currently a dividend contender with 19 years of dividend growth.  The 20th increase is expected in the next few weeks.

Simply Safe Dividends

simply safe dividends for sjm

With a score of 97, J.M. Smucker ranks higher than 97% of dividend paying companies in the Simply Safe Dividends universe.  Dividend safety is my most important consideration and everything flows from there.  I’ve gotten burned in the past, notably Kinder Morgan and BHP Billiton having cut their dividends.  At that time, I did not have access to SSD and wish I had.

The company also scores slightly above average in both terms of growth and current yield which is a fair shake to me.  The dividend yield is slightly higher than the S&P and dividend growth has been quite good for many years.

simply safe dividends dividend growth history sjm

While the dividend growth has slown in recent years, with the 1, 3 and 5 year growth rate being lower than the 10 year, 8%+ growth is nothing to sneeze at.  I’m optimistic for a similar increase when they announce in a few weeks.

free cash flow payout for sjm

Given where the free cash flow payout is, I won’t be alarmed if a sizeable increase isn’t announced.  I realize top line growth has slowed some and they are still digesting the Big Heart acquisition.  Repurchasing shares at this price point wouldn’t be that bad of a move either.

Conclusion

It’s just nice to know that there is room to grow.  Smucker is not a company trading at 20-25x earnings that also has a 70% payout ratio with no room to grow.  Investors can still see nice total return from this one.  This is a company that may quietly beat the market over the next decade, with a steady business model and through proper capital allocation.

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