Dividend Aristocrats In Focus: The J.M. Smucker Firm

Up to date on January twenty seventh, 2023 by Jonathan Weber

At Positive Dividend, we regularly discuss concerning the deserves of the Dividend Aristocrats. We imagine this unique group of shares broadly has robust manufacturers, constant earnings even throughout recessions, and sturdy aggressive benefits. These qualities permit the Dividend Aristocrats to lift their dividends yearly, whatever the state of the economic system.

Of the five hundred shares comprising the S&P 500 Index, simply 68 qualify as Dividend Aristocrats. You possibly can obtain a replica of the total record of all 68 Dividend Aristocrats, full with metrics like dividend yields and P/E ratios, by clicking on the hyperlink under:

Every year, we individually evaluation all of the Dividend Aristocrats. The following within the sequence is The J.M. Smucker Firm (SJM). J.M. Smucker has an extended historical past of dividend progress, having raised its dividend for 26 years in a row. This text will talk about the key components for J.M. Smucker’s lengthy dividend historical past and its outlook.

Enterprise Overview

J.M. Smucker has been in enterprise for greater than 100 years. It began out all the best way again within the nineteenth century when the corporate was based in 1897 at a small cider mill in Orrville, Ohio.

Right this moment, J.M. Smucker has a market capitalization of $16 billion and generates annual income of greater than $8 billion. J.M. Smucker is a packaged meals and drinks firm that owns well-known manufacturers corresponding to Smucker’s, Jif, Folgers, and so forth. The corporate additionally owns a pet meals enterprise with manufacturers corresponding to Milk Bone and 9Lives.

Development Prospects

J.M. Smucker’s trade isn’t rising quick, as demand for meals just isn’t rising an excessive amount of based mostly on financial growth. As an alternative, meals consumption is mostly rising rather less than financial output, as it’s principally tied to inhabitants progress. Nonetheless, J.M. Smucker can generate progress in several methods, regardless of being energetic in a lower-growth trade.

Acquisitions have been a serious supply of enterprise progress for the corporate prior to now:

Supply: Investor Presentation

The corporate repeatedly acquires smaller corporations which are then benefitting from J.M. Smucker’s gross sales community. On prime of that, the corporate is ready to seize synergies on the subject of administration and different areas, which drives the profitability of the businesses J.M. Smucker acquires.

Supply: Investor Presentation

Acquisitions prior to now included the Large Coronary heart Pet Manufacturers acquisition in 2015, which allowed the corporate to enter the pet meals market in power. The pet meals market is rising quicker than the meals and drinks market, thus acquisitions on this space increase J.M. Smucker’s natural progress outlook. Value will increase are one other income progress, as this permits J.M. Smucker to develop its prime line greater than quantity progress alone would do.

The corporate reported its most up-to-date quarterly leads to November, showcasing income progress of 8% yr over yr. Natural gross sales progress was even higher, at 11%, primarily thanks to cost will increase, however forex price actions (a strengthening US Greenback) made J.M. Smucker’s reported prime line develop rather less than the natural gross sales efficiency suggests.

J.M. Smucker noticed its earnings-per-share decline marginally, nevertheless, by 1%, as earnings-per-share dropped from $2.43 to $2.40, as a result of commodity value inflation that pressured the corporate’s margins.

In the long term, we imagine that present margin headwinds from rising commodity costs will wane, or that the corporate will totally cross on these rising prices to customers. Some natural enterprise progress, some M&A, and the influence of share repurchases ought to permit J.M. Smucker to develop its earnings-per-share by round 5% a yr in the long term, we imagine.

Aggressive Benefits & Recession Efficiency

J.M. Smucker just isn’t the biggest participant within the meals and drinks area by far, however it’s among the many main gamers within the segments it’s energetic in, corresponding to espresso bought at retailers, peanut butter and different breakfast spreads, pet meals, and so forth.

J.M. Smucker’s manufacturers are well-known and preferred amongst customers, thus it isn’t very probably that new market entrants will disrupt the corporate’s core enterprise. There’s, nevertheless, an obstacle on the subject of the well being facet of meals. J.M. Smucker’s choices aren’t very wholesome on common, thus the corporate is uncovered to headwinds from customers shifting a few of their spending from the extra conventional meals J.M. Smucker presents to more healthy options.

A significant benefit for J.M. Smucker is its excellent recession resilience. Shoppers do reduce on their spending throughout financial downturns, however they accomplish that in discretionary areas — autos, electronics, attire, and so forth. They often don’t actually lower their spending on meals and drinks, which is why J.M. Smucker and most of its friends have outperformed throughout recessions prior to now.

The corporate’s earnings-per-share efficiency throughout the Nice Recession is under:

2007 earnings-per-share of $3.15
2008 earnings-per-share of $3.77 (20% enhance)
2009 earnings-per-share of $4.37 (16% enhance)
2010 earnings-per-share of $4.79 (10% enhance)

We see that J.M. Smucker didn’t solely handle to develop its earnings-per-share throughout yearly of the Nice Recession, but it surely even generated a really compelling common progress price of 15% in that time-frame — barely some other firm has managed to carry out so effectively throughout the disaster.

The identical held true throughout the pandemic, as J.M. Smucker additionally managed to develop its earnings-per-share by 14% in 2020 when the economic system was affected by lockdowns and different COVID measures.

J.M. Smucker’s recession resilience is one among its greatest benefits and makes it an acceptable alternative from a danger perspective.

Valuation & Anticipated Returns

Utilizing the present share worth of ~$150 and the midpoint for earnings steering of $7.00 for the yr, J.M. Smucker trades for a price-to-earnings ratio of 21.4. Given the corporate’s robust recession efficiency, however not overly robust progress outlook, we really feel {that a} goal price-to-earnings ratio of 16 is acceptable. That is additionally roughly consistent with the corporate’s 10-year historic common.

In consequence, J.M. Smucker is at the moment overvalued. Returning to our goal price-to-earnings ratio by 2028 would cut back annual returns by round 5% over this time period. Other than modifications within the price-to-earnings a number of, future returns can be pushed by earnings progress and dividends.

We count on 5% annual earnings progress over the following 5 years. As well as, J.M. Smucker inventory is at the moment buying and selling with a dividend yield of two.7%.

Complete returns may encompass the next:

5% earnings progress
-5% a number of reversion
2.7% dividend yield

J.M. Smucker is thus anticipated to return round 3% per yr by 2028. This isn’t compelling, which is why we price J.M. Smucker a “Promote” as we speak, regardless of the corporate’s robust recession resilience and dividend progress observe report.

Last Ideas

J.M. Smucker is a top quality firm with a robust dividend progress observe report and an excellent capacity to face up to recessions and different macro crises.

However shares are buying and selling effectively above our honest worth estimate proper now, which is why we don’t count on J.M. Smucker to generate compelling whole returns going ahead. The present dividend yield could be very strong and appears secure, however as a result of anticipated whole returns being solely within the 3% vary over the approaching years, we price J.M. Smucker a promote at present costs.

Moreover, the next Positive Dividend databases comprise essentially the most dependable dividend growers in our funding universe:

For those who’re in search of shares with distinctive dividend traits, think about the next Positive Dividend databases:

The key home inventory market indices are one other strong useful resource for locating funding concepts. Positive Dividend compiles the next inventory market databases and updates them month-to-month: