Consumer staples have been one of the best-performing market sectors over the past year. One stock in the industry that has significantly outperformed the S&P 500 for an extended time is The J.M. Smucker Company (SJM ). Smucker’s has a company history that goes back more than 115 years. Since then, it has steadily built up a large product portfolio with many popular brands – a few of which include Smucker’s, as well as Jif, Pillsbury and Folgers.
Investors currently favor consumers staples’ companies like Smucker’s because it is a very stable business that generates reliable profits and modest growth each year. It is a very defensive business because consumers purchase food regularly, even when the economy goes into recession. In turn, Smucker’s has rewarded long-term shareholders with rock-solid dividends like clockwork. Smucker’s has paid uninterrupted dividends since 1949 and increased its dividend 15 years in a row.
Smucker’s recently raised its dividend by 12%, from $0.67 per share to $0.75 per share. The annual payout now goes to $3 per share, which represents a 2% yield. The stock has a dividend yield that meets the S&P 500 average yield, plus above-average dividend growth and a strong brand portfolio. Smucker’s is an attractive dividend growth stock.
Earnings & Dividend Growth
The reason why Smucker’s stock has performed so well over the past year is because of its excellent fundamentals. Last quarter, net sales increased 25% driven by the Big Heart Pet Brands acquisition last year. The company also saw growth in its U.S. coffee business, thanks in large part to falling coffee prices. Smucker’s broad strategic imperative over the past year has been a two-fold increase in profits by growing revenue from acquisitions and then achieving cost cuts to drive earnings growth.
The acquisition of Big Heart Pet Brands will fuel growth over the long-term, because pet spending continues to rise in the United States. Data collected over the last several years suggests pet health care is a growth industry. In 2014, the American Pet Products Association reported that 79.7 million U.S. households owned at least one pet, which was up 50% from two decades prior. Furthermore, not only is the number of households with a pet increasing, but average spending is rising as well. The survey also found that overall spending in the U.S. pet industry rose 4.2% in 2014. As a result, Smucker’s decision to diversify into pet food is a wise strategy for management to take. This diversifies the company’s product portfolio and also provides entry into a growth industry. The U.S. retail pet food business is now Smucker’s largest operating segment according to revenue.
Smucker’s is seeing some headwinds that could limit future growth – including the strong U.S. dollar, which is hurting sales and profit earned overseas. But this is more than offset by growth in volumes, price increases and lower commodity costs. The price of coffee has fallen over the past year, which increased profit in the company’s U.S. coffee segment by 39% last quarter. This is a big help to the company because the coffee business is Smucker’s second-largest segment by revenue.
Due to its acquisitions, organic growth from its existing products and cost cuts, Smucker’s earnings soared 73% last year to $5.77 per share. The company expects adjusted, non-GAAP earnings to increase 33% this year to $7.70 per share, and by another 8% in 2017. This will fuel future dividend growth to continue for many years. Smucker’s has realized significant growth in sales and has raised its dividend each year over the past five years.
As earnings continue to grow, it should lead to dividend growth as well.
With this in mind, the one thing to quibble about with Smucker’s could be its valuation. The stock has increased significantly over the past one year, and it is now valued at more than 20 times forward earnings. That is above the valuation level of the S&P 500 – which may concern investors based on valuation – but should not deter investors because premium companies frequently earn premium valuations. Smucker’s is generating high rates of revenue and earnings growth, which justify its current valuation multiples.
In addition, Smucker’s is a strong dividend growth stock. The current yield is 2.2% and future dividends will likely increase from dividend growth. The current $3 per share annualized dividend represents just 38% of the company’s expected earnings in the current fiscal year. Its payout ratio is less than half of projected earnings, which means the dividend is secure and there is room for future dividend growth.
The Bottom Line
Smucker’s has benefited from a market rotation into defensive dividend stocks like consumer staples. The company has an aggressive strategy of acquisitions and cost cuts which is driving major earnings and dividend growth. As a result, the stock is attractive for growth and income.