JM Smucker stock: Treat yourself to tasty dividends (NYSE: SJM)
Rome wasn’t built in a day, and neither should an income portfolio. The approach some like to take is to use company-specific dividends to fund similar day-to-day expenses. For example, dividends from so-called “distressed stocks” can be used as beer money, Verizon dividends (VZ) and AT&T (J) can be used to pay his monthly cell phone bill.
This brings me to JM Smucker (NYSE: SJM), whose familiar products are ubiquitous in most grocery stores. In this article, I outline why SJM can be a solid choice for income investors looking for dividends from the comfort of a well-respected company, so let’s get started.
JM Smucker is a diversified food company operating in the United States, Canada and Europe. The company’s well-known brands include Smucker’s Jams, Folgers Coffee and Jif Peanut Butter Spread. Unbeknownst to some, Smucker’s also has exposure to the growing pet food segment, including Milk-Bone, Meow Mix and Kibbles ‘n Bits, among others. This segment accounts for an impressive $2.8 billion, or 35% of Smucker’s annual sales, as shown below.
Smucker continues to do well, with net sales growing 9% year-over-year excluding divestitures and currency effects during the fourth quarter (ended April 30, 2022). Notably, this despite a 1% adverse impact from the recent Jif peanut butter recall. For the full year, net sales excluding divestitures and currency effects increased by a further respectable 5%.
SJM also enjoys strong operating leverage due to its economy of scale. This is reflected in its B rating for profitability. As shown below, SJM’s EBITDA and net income margins of 20% and 8% are well above the industry median in the competitive consumer staples segment.
Looking ahead, management has provided encouraging guidance, with net sales expected to grow 3.5% to 4.5% in the current fiscal year 2023. Part of that could be due to Smucker’s hot Uncrustables brand, which is ready-to-eat peanut butter and jelly sandwiches. that meet consumer preferences for simplicity and convenience. This is backed up by the fact that Smucker made 1 billion of these sandwiches in fiscal year 2022, a record for the company.
Risks for Smucker include supply chain disruptions, as management noted that demand exceeded supply in some segments. Additionally, cost inflation is a risk, as Smucker’s may need to raise prices more aggressively relative to historical norms to counter rising input costs. This may encourage consumers to turn to private label products at lower prices. Management, however, is confident in its ability to maintain market share, as CEO Mark Smucker noted during the recent conference call Q&A session:
Q: So I’m just curious, you talked about how you took a lot of prizes, and you feel really good about it. You also guided the elasticity a bit. But Mark, are there things you can explain to investors why they should feel comfortable that the elasticity won’t be much worse than you expect? Or maybe retailers won’t really lean on you and your competitors to start promoting more?
A: We have great confidence in our portfolio. And I think when you look at the results, particularly this quarter, 86% of our portfolio growing or in maintenance, that’s not happening. It really is a combination of fantastic investment in our business, execution by our people and execution of our strategy through which we have refined our portfolio. And so all of these factors contributed to these fantastic results. We are therefore convinced that our strategy really works.
And then more specifically elasticity, even in the quarter we saw elasticity coming in better than expected. This trend has continued. As you’ve heard from us, we’re modeling, moving forward, some elasticity. But in the end, because we were able to execute our strategy, we refined our portfolio. We’re really in fairly resilient categories and our offerings across these categories are focused on a variety of value propositions and play across multiple segments. We therefore believe that we are very well positioned in this environment and that we will continue to execute our strategy.
Meanwhile, SJM boasts a strong BBB-rated balance sheet, and recent weakness in its share price has pushed the dividend yield up to 3.2%. The dividend is well protected by a 45% payout ratio and comes with 19 consecutive years of growth, including a 5-year dividend CAGR of 6%.
As such, I see SJM as well on its way to becoming a dividend aristocrat. As shown below, SJM scores high dividend ratings, including an A+ for dividend growth relative to the consumer staples sector.
I see value in the action at the current price of $122, with a blended P/E of just 13.9, comfortably below its normal P/E of 16.6 over the past decade. Sell-side analysts have an average price target of $132 and Morningstar has a fair value estimate of $138, implying a one-year total return of 11-16% including dividends.
Key takeaway for investors
JM Smucker is a high quality dividend growth stock that is attractively valued at the current price. The company has strong market positions in many categories, and its recent share price weakness has driven the dividend yield up 3.2%. SJM can be a good investment option for those looking for a safe and growing dividend stream from a household name.