Updated Jan 27, 2023 by Jonathan Weber
At Suredividend, we often talk about the benefits of being a Dividend Nobility. We believe this exclusive group of stocks has strong brands, consistent earnings even during downturns, and enduring competitive advantages across the board. These qualities allow Dividend Aristocrats to raise their dividend every year, regardless of the state of the economy.
Of the 500 stocks that make up the S&P 500 Index, only 68 are Dividend Aristocrats. You can download a copy of the complete list of all 68 Dividend Aristocrats with metrics such as dividend yield and her P/E ratio by clicking the link below.
We review all Dividend Aristocrats individually each year. Next in the series is the JM Smucker Company (SJM). JM Smucker has a long history of dividend growth, with 26 consecutive years of dividend increases. This article discusses JM Smucker’s long dividend history and the key factors behind its outlook.
Business overview
JM Smucker has been in business for over 100 years. The company dates back to the 19th century when it was founded in 1897 in a small cider factory in Orville, Ohio.
Today, JM Smucker has a market capitalization of $16 billion and annual revenues of over $8 billion. JM Smucker is a packaged food and beverage company with well-known brands including: Smucker’s, Jif, Folgers, and so on. The company also owns pet food businesses with brands such as: milk bone When 9Lives.
growth outlook
JM Smucker’s industry is not growing rapidly as the demand for food has not grown much based on economic development. Instead, food consumption generally grows slightly less than economic production, as it is mostly tied to population growth. Still, JM Smucker, despite operating in a low-growth industry, can generate growth in a number of ways.
Acquisitions have historically been a major source of business growth for the company.
Source: Presentation for investors
The company regularly acquires small businesses and benefits from JM Smucker’s distribution network. In addition, the company will be able to obtain synergies in management and other areas, increasing the profitability of companies acquired by JM Smucker.
Source: Presentation for investors
Previous acquisitions included the acquisition of Big Heart Pet Brands in 2015, which allowed the company to enter the pet food market in earnest. The pet food market is growing faster than the food and beverage market, so an acquisition in this area will boost his JM Smucker’s organic growth prospects. Rising prices are another source of revenue growth. This allows JM Smucker to generate more sales than just increasing sales volume.
The company reported its latest quarterly results in November, showing revenue growth of 8% year-over-year. Organic sales growth was better at 11%, largely due to price increases, but exchange rate movements (strength of the US dollar) caused JM Smucker’s reported sales growth to be lower than organic sales growth. slightly lower than the high performance suggests.
Earnings per share at JM Smucker decreased slightly, down 1%. That’s because earnings per share he dropped from $2.43 to $2.40.
Longer term, we believe the current margin headwinds from rising commodity prices will abate or companies will pass those rising costs entirely on to consumers. With some organic business growth, some of his M&A, and the impact of share buybacks, JM Smucker’s earnings per share are expected to grow by about 5% annually over the long term.
Competitive Advantage and Recession Performance
JM Smucker isn’t the biggest player in the food and beverage space, but it’s a major player in areas where it’s aggressive, such as retail coffee, peanut butter and other breakfast spreads, and pet food. One of the players. upon.
JM Smucker’s brands are well known and preferred among consumers, so new market entrants are unlikely to disrupt the company’s core business. However, there are drawbacks when it comes to the health aspect of food. Because JM Smucker’s products are not very healthy on average, the company faces headwinds as consumers shift some of their spending from the more traditional foods his JM Smucker offers to healthier alternatives. are exposed.
A major advantage of JM Smucker is its outstanding recession resilience. Consumers cut spending during a recession, but cut spending in any sector, such as autos, electronics, or apparel. They usually haven’t really cut back on food and drink spending. As such, JM Smucker and most of its peers have outperformed during past recessions.
The company’s earnings per share during the Great Recession were as follows:
- Earnings per share of $3.15 in 2007
- Earnings per share of $3.77 in 2008, up 20%
- Earnings per share of $4.37 in 2009, up 16%
- 2010 earnings per share of $4.79, up 10%
JM Smucker not only managed to grow its earnings per share year after year during the Great Recession, but also achieved a very compelling average growth rate of 15% during that period. Works very well during a crisis.
The same was true during the pandemic, as JM Smucker was able to increase its earnings per share by 14% in 2020 when the economy was struggling with lockdowns and other COVID measures.
JM Smucker’s resilience to recession is one of its greatest advantages, making it a good choice from a risk perspective.
Valuation and Expected Return
With the current stock price below $150 and using the midpoint yearly earnings projection of $7.00, JM Smucker has a price/earnings ratio of 21.4. Given the company’s strong recession performance, but not overly strong growth prospects, we feel a target price/earnings ratio of 16 is appropriate. This is roughly in line with the company’s average over the last ten years.
As a result, JM Smucker is currently overrated. A return to the target price/earnings ratio by 2028 would reduce the annual return by about 5% over this period. Aside from changes in the price/earnings ratio, future returns are driven by earnings growth and dividends.
We expect annual profit growth of 5% over the next five years. Additionally, JM Smucker shares currently trade at a dividend yield of 2.7%.
A total return consists of:
- 5% more revenue
- -5% Return multiple times
- 2.7% dividend yield
JM Smucker is therefore expected to return approximately 3% annually through 2028. This is not convincing. As such, we currently rate JM Smucker as Sell, despite the company’s strong track record of recession resilience and dividend growth.
final thoughts
JM Smucker is a quality company with a strong track record of dividend growth and an excellent ability to withstand recessions and other macro crises.
However, we do not believe JM Smucker will generate attractive total returns going forward as the stock is currently trading well above fair value estimates. At current prices, he rates JM Smucker as a sell, as the current dividend yield looks very solid and safe, but the expected total return over the next few years is only in the 3% range.
Additionally, the following Sure Dividend databases contain the most reliable dividend growers in our investment universe.
If you’re looking for stocks with unique dividend characteristics, consider the Sure Dividend database below.
Major domestic stock market indices are another solid resource for finding investment ideas. Sure Dividend compiles and updates the following stock market databases monthly.
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