Updated January 27, 2023 by Jonathan Weber
At Sure Dividend, we often talk about the merits of the Dividend Aristocrats. We believe this unique group of stocks have strong brands, consistent earnings even during downturns, and enduring competitive advantages. These qualities allow Dividend Aristocrats to increase their dividends every year, regardless of the state of the economy.
Of the 500 stocks that make up the S&P 500 Index, only 68 qualify as Dividend Aristocrats. You can download a copy of the full list of the 68 Dividend Aristocrats, complete with metrics like dividend yields and P/E ratios, by clicking the link below:
Each year, we individually review all Dividend Aristocrats. Next in the series is The JM Smucker Company (SJM). JM Smucker has a long history of dividend growth, having raised its dividend for 26 years in a row. This article will discuss the main factors behind JM Smucker’s long dividend history and his outlook.
JM Smucker has been in business for over 100 years. It began in the 19th century when the company was founded in 1897 in a small cider mill in Orrville, Ohio.
Today, JM Smucker has a market capitalization of $16 billion and generates annual revenue of more than $8 billion. JM Smucker is a packaged food and beverage company that owns well-known brands such as Smucker’s, Jif, Folgers, and so. The company also owns a pet food business with brands like milk bone Y 9Lives.
The JM Smucker industry is not growing fast as the demand for food is not growing much in line with economic development. Instead, food consumption is generally growing slightly less than economic output, since it is mainly tied to population growth. Still, JM Smucker can deliver growth in a number of ways, despite being active in a slower-growth industry.
Acquisitions have been a significant source of business growth for the company in the past:
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The company regularly acquires smaller companies that then benefit from JM Smucker’s sales network. On top of that, the company is able to capture synergies when it comes to administration and other areas, which drives the profitability of the companies that JM Smucker acquires.
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Past acquisitions included the acquisition of Big Heart Pet Brands in 2015, allowing the company to enter the pet food market with a bang. The pet food market is growing faster than the food and beverage market, so acquisitions in this area boost JM Smucker’s organic growth prospects. Price increases are another source of revenue growth, as this allows JM Smucker to grow its top line more than volume growth alone would.
The company reported its most recent quarterly results in November, showing revenue growth of 8% year-over-year. Organic sales growth was even better at 11%, mainly thanks to price increases, but exchange rate movements (a stronger US dollar) caused the top line reported by JM Smucker to grow slightly less than which suggests the performance of organic sales.
However, JM Smucker experienced a marginal decline in earnings per share of 1%, as earnings per share fell from $2.43 to $2.40, due to commodity cost inflation that pressured margins of the company
In the long term, we believe that current margin headwinds from rising commodity prices will ease, or that the company will pass those rising costs on to consumers entirely. We believe some organic business growth, some M&A and the impact of share buybacks should allow JM Smucker to increase earnings per share by around 5% per year over the long term.
Competitive advantages and performance in recession
JM Smucker isn’t the biggest player in the food and beverage space by far, but it is among the leading players in the segments in which it is active, such as retail coffee, peanut butter, and other products. breakfast spreads, pet food, etc. in.
JM Smucker’s brands are well known and appreciated among consumers, so new entrants to the market are unlikely to disrupt the company’s core business. However, there is a downside when it comes to the healthy aspect of food. JM Smucker’s offerings aren’t very healthy on average, so the company is exposed to headwinds from consumers shifting part of their spending away from the more traditional foods JM Smucker offers to healthier alternatives.
One of the main advantages of JM Smucker is its excellent resistance to recession. Consumers cut spending during economic downturns, but they do so in discretionary areas: cars, electronics, clothing, etc. They typically don’t really cut back on food and beverage spending, which is why JM Smucker and most of his peers have fared better during past recessions.
The company’s earnings per share performance during the Great Recession is as follows:
- 2007 earnings per share of $3.15
- 2008 earnings per share of $3.77 (20% increase)
- 2009 earnings per share of $4.37 (16% increase)
- 2010 earnings per share of $4.79 (10% increase)
We see that JM Smucker not only managed to grow its earnings per share through all the years of the Great Recession, but even delivered a very convincing average growth rate of 15% in that time period; hardly any other company has done as well during the crisis.
The same was true during the pandemic, as JM Smucker also managed to increase its earnings per share by 14% in 2020 as the economy suffered from lockdowns and other COVID measures.
JM Smucker’s recession resilience is one of his biggest advantages and makes him a suitable choice from a risk perspective.
Valuation and expected return
Using the current share price of ~$150 and the midpoint earnings guidance of $7.00 for the year, JM Smucker is trading at a price-earnings ratio of 21.4. Given the company’s strong performance during the recession, but not a very strong growth outlook, we believe a target price-earnings ratio of 16 is appropriate. This is also roughly in line with the company’s 10-year historical average.
As a result, JM Smucker is currently overvalued. Returning to our target price-earnings ratio by 2028 would reduce annual returns by around 5% over this time period. Aside from changes in the price-earnings multiple, future returns will be driven by earnings growth and dividends.
We expect 5% annual earnings growth over the next five years. In addition, JM Smucker shares are currently trading with a dividend yield of 2.7%.
Total returns could consist of the following:
- 5% profit growth
- -5% multiple reversal
- 2.7% dividend yield
Therefore, JM Smucker is expected to return around 3% a year through 2028. This is not convincing, which is why we rate JM Smucker “Sell” today, despite strong recession resilience and growth history. of company dividends.
JM Smucker is a quality company with a strong track record of dividend growth and an outstanding ability to weather recessions and other macro crises.
But the stock is trading well above our fair value estimate at the moment, so we don’t expect JM Smucker to generate compelling total returns in the future. The current dividend yield is very strong and appears safe, but with expected total returns only in the 3% range over the next few years, we rate JM Smucker a sell at current prices.
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