Shares of the J.M. Smucker Company (SJM, Financial) have gained nearly 17% year-to-date through Wednesday's close, easily topping the 7.7% return for the S&P 500 index.
J.M. Smucker is the maker of brands such as Smucker's fruit spreads, Jif peanut butter, Folgers and Milk Bone. It has benefited greatly from the closing of restaurants due to the Covid-19 pandemic, which has caused consumers to buy more packaged foods to eat at home.
While the most recent quarter demonstrated the company's strength, I believe that J.M. Smucker isn't done with its price run. Let's take a look.
Quarterly highlights
J.M. Smucker released first quarter earnings results for its fiscal year 2021 on Aug. 25 (the company's fiscal year ends April 30). Expectations for revenue and earnings from the analyst community were already elevated, but the company easily bested predictions. Revenue grew almost 11% year-over-year to $2 billion, which was $161 million ahead of analysts' average estimates. This was also a slight acceleration from the fourth quarter of fiscal 2020, where sales grew 10%. Adjusted earnings per share increased 79 cents, or 50%, to $2.37. This was a beat of analyst estimates by 70 cents.
The weighted average share count was greater in the most recent quarter compared to the previous year, so share repurchases didn't have a positive impact on results.
Sales for U.S. Retail Pet Foods grew 3% to $692.6 million while segment profit margins improved 20 basis points to 18.1%. This segment had 5% growth in volume and mix, with pronounced strength found in 9Lives, Meow Mix and Milk-Bone. On the other hand, Natural Balance and Nature's Recipe were lower due to a rise in advertising spending.
U.S. Retail Coffee sales spiked 23% to $570.9 million. Profit margins improved 430 basis points to 32%. Demand was elevated for Dunkin' Donuts, Folgers and Café Bustelo coffee due to higher at-home consumption. With coffee shops among those closed due to the pandemic, consumers turned to name brand products.
U.S. Retail Consumer Foods revenue improved 22% to $489.2 million with profit margins growing by almost 7% to 26.9%. This segment had 19% growth in volume and mix. The Smucker's brand, especially Uncrustables frozen sandwiches and spreads, were a real standout during the quarter. Also aiding results was Jif peanut butter and Crisco oils and shortening. Higher realized prices because of lower promotional activity for Jif and Smucker's products added 3% to sales totals.
Offsetting these gains was a 9% sales decline to $219.1 million for the International & Away From Home segment. Away From Home sales were lower by 33% on severe drops in demand for products.
On the plus side, international sales climbed 21% and profit margin climbed 70 basis points to 14.1% even as profit was down 4%.
Looking at margins, adjusted gross margins were up 80 basis points to 38.5% and were above consensus estimates of 37.2%. Adjusted operating margins rose 420 basis points to 20.5% and came in much higher than consensus predictions of 16.5%.
J.M. Smucker also updated its guidance for the fiscal year. The company now expects revenue to be flat or up 1% versus a prior estimate of a 1% to 2% decrease. Analysts predict revenue will be down 2%. The company raised its EPS estimates to $8.20 to $8.60 from $7.90 to $8.30 previously. The midpoint would represent 26% growth from the prior year.
Away From Home sales were down as demand dried up to closing of customer businesses in response to the pandemic. J.M. Smucker had significant growth in U.S. Retail Coffee and U.S Retail Consumer Foods. This led to high levels of growth on both the top and bottom-lines, resulting in higher expectations for the remainder of the year.
Dividend and valuation analysis
Dividend growth investors are often drawn to the consumer staple sector as these companies often have steady, reliable growth rates. This allows them to raise dividends as they can usually count on generating more profits during most years.
J.M. Smucker is no different as EPS has compounded at a rate of 3.6% over the last decade while sales have grown at an annual rate of nearly 5%.
Following a modest increase of 2.3% for the Aug. 13 payment, the company has now raised its dividend for 23 consecutive years.
The company's dividend has increased by an average of:
- 6.8% per year over the last three years.
- 7.2% per year over the past 5 years.
- 9.7% per year over the past 10 years.
Dividend growth has slowed over the listed periods of time, but the stock yields just under 3% based off of Wednesday's closing price. The stock's yield today is higher than the 10-year average yield of 2.6%. For additional context, J.M. Smucker has averaged a 3% yield for an entire year only twice since 2004, in 2018 and 2019. The current yield is 1.3% higher than the average yield of the S&P 500.
J.M. Smucker's dividend also looks to be well protected using either the EPS or free cash flow payout ratios.
With an annualized dividend of $3.60 and the midpoint for the company's EPS guidance of $8.40, the expected EPS payout ratio is 43%. The average payout ratio since 2010 has been 45%, as J.M. Smucker tends to keep a pretty tight payout range. I take this to be a positive sign that the business and dividend are well managed by the company, as the payout ratio is quite consistent.
The free cash flow payout ratio reinforces this belief. J.M. Smucker distributed $100 million of dividends in the most recent quarter while producing free cash flow of $332 million for a free cash flow payout ratio of 30%. Over the last four years, the company had paid out $1.464 billion of dividends. Free cash flow totaled $3.529 billion during this time for an average payout ratio of 41%.
In addition to a solid dividend growth streak and healthy payout ratios, J.M. Smucker is undervalued against its own past price-earnings ratio. The stock closed Wednesday's trading session at $121.73, giving the stock a forward price-earnings ratio of 14.5 based on its guidance. The five and 10-year average price-earnings ratios are 18.1 and 16.4, respectively.
Using these average valuations as a guide, I have a fair value price-earnings ratio of 16 to 18 for shares of J.M. Smucker. Applying the midpoint of EPS guidance to this range, I have a price target range of $134 to $151. Shares could have upside potential of 10.1% to 24% from the most recent close based on these assumptions.
The stock would yield 2.7% at the low end of my price range and 2.4% at the high end. Adding in the dividend yield could result in a total return of 12.8% to 26.4%.
Final thoughts
The share price returns for J.M. Smucker have more than doubled the market index in 2020. It is not hard to understand with results like the first quarter.
Even with this high-teens percentage increase in share price, the stock trades with a valuation that is below its medium and long-term averages. In my opinion, results like the first quarter should allow for some multiple expansion. Even moving to the low end of my target valuation range would lead to a 10% increase in share price before the dividend yield is even considered.
Thus, I think investors looking for exposure to the consumer staples sector could consider buying J.M. Smucker for multiple expansion and income.
Author disclosure: the author has no position in any stock mentioned in this article.
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