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

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

At Certain Dividend, we regularly discuss concerning the deserves of the Dividend Aristocrats. We imagine this unique group of shares broadly has sturdy 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 financial system.

Of the five hundred shares comprising the S&P 500 Index, simply 68 qualify as Dividend Aristocrats. You’ll be able to obtain a duplicate of the total record of all 68 Dividend Aristocrats, full with metrics like dividend yields and P/E ratios, by clicking on the hyperlink beneath:

Annually, we individually evaluation all of the Dividend Aristocrats. The subsequent 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 most important elements 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.

Immediately, 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 equivalent to Smucker’s, Jif, Folgers, and so forth. The corporate additionally owns a pet meals enterprise with manufacturers equivalent to Milk Bone and 9Lives.

Progress 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 a substitute, meals consumption is usually rising rather less than financial output, as it’s largely 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 previously:

Supply: Investor Presentation

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

Supply: Investor Presentation

Acquisitions previously included the Large Coronary heart Pet Manufacturers acquisition in 2015, which allowed the corporate to enter the pet meals market in pressure. 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 foreign money fee 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, nonetheless, by 1%, as earnings-per-share dropped from $2.43 to $2.40, attributable to 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 go on these rising prices to shoppers. Some natural enterprise progress, some M&A, and the impression 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, equivalent to espresso offered at retailers, peanut butter and different breakfast spreads, pet meals, and so forth.

J.M. Smucker’s manufacturers are well-known and favored amongst shoppers, thus it’s not very seemingly that new market entrants will disrupt the corporate’s core enterprise. There’s, nonetheless, a drawback in relation to the well being side of meals. J.M. Smucker’s choices aren’t very wholesome on common, thus the corporate is uncovered to headwinds from shoppers shifting a few of their spending from the extra conventional meals J.M. Smucker affords to more healthy options.

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

The corporate’s earnings-per-share efficiency in the course of the Nice Recession is beneath:

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

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

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

J.M. Smucker’s recession resilience is certainly one of its greatest benefits and makes it an appropriate selection from a threat perspective.

Valuation & Anticipated Returns

Utilizing the present share value 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 sturdy recession efficiency, however not overly sturdy progress outlook, we really feel {that a} goal price-to-earnings ratio of 16 is suitable. That is additionally roughly consistent with the corporate’s 10-year historic common.

Consequently, J.M. Smucker is at present overvalued. Returning to our goal price-to-earnings ratio by 2028 would cut back annual returns by round 5% over this time period. Except for adjustments within the price-to-earnings a number of, future returns shall be pushed by earnings progress and dividends.

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

Whole returns may include 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 fee J.M. Smucker a “Promote” at this time, regardless of the corporate’s sturdy recession resilience and dividend progress observe report.

Closing Ideas

J.M. Smucker is a high quality firm with a robust dividend progress observe report and an excellent skill to resist recessions and different macro crises.

However shares are buying and selling nicely above our truthful worth estimate proper now, which is why we don’t anticipate J.M. Smucker to generate compelling complete returns going ahead. The present dividend yield could be very strong and appears protected, however attributable to anticipated complete returns being solely within the 3% vary over the approaching years, we fee J.M. Smucker a promote at present costs.

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

In case you’re searching for shares with distinctive dividend traits, contemplate the next Certain Dividend databases:

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