The main goal of an income investor is to buy businesses that deliver steadily rising passive income. When an income portfolio is properly diversified in quality businesses throughout a variety of sectors, an investor practically can't help but succeed.
The consumer staples company J.M. Smucker (SJM -0.27%) is a common fixture within the portfolios of many income-oriented investors. This raises the question: Should you trust J.M. Smucker and its 2.9% dividend yield enough to add it to your portfolio? Let's examine the company's fundamentals and valuation to get an answer.
Consumption habits and brand power are fueling growth
J.M. Smucker possesses an enviable hold on the U.S. market in several product categories, including leading positions in coffee, pet food, fruit spreads, and peanut butter. This is thanks to widely popular brands, such as Folgers coffee, Meow Mix cat food, Smucker's jam and jellies, and Jif peanut butter.
| Metric | Q1 2023 | Q1 2024 |
|---|---|---|
| Organic constant currency net sales growth rate (YOY) | 4% | 21% |
| Net margin | 9.5% | 12.6% |
| Diluted share count (in millions) | 106.8 | 102.8 |
Data source: J.M. Smucker. YOY = year over year.
J.M. Smucker's net sales fell 3.6% over the year-ago period to $1.8 billion in its fiscal first quarter ended July 31. On its face, a decline in the top line isn't what investors want to see. But the consumer staple's fundamentals remain intact.
Earlier this calendar year, J.M. Smucker divested multiple pet food brands, including 9Lives, Kibbles 'n Bits, and Rachael Ray Nutrish to Post in a deal worth $1.2 billion. The idea behind the divestiture is that this deal will allow the company to focus more on its Milk-Bone dog treats and Meow Mix brands to drive growth. Excluding this divestiture and unfavorable foreign currency translation from a stronger U.S. dollar, J.M. Smucker's constant-currency organic net sales rocketed higher during the fiscal first quarter.
This was mostly driven by a 13% year-over-year growth rate in the company's volume and mix for the period. That was due to the lower bar to clear set by the Jif peanut butter recall in the prior year, which contributed to 9% of its constant currency organic net sales growth. Thanks to the fact that its brands are regularly used by millions of people, J.M. Smucker was also able to pass 8% price hikes onto its consumers with little resistance.
The Ohio-based company's non-GAAP (adjusted) diluted earnings per share (EPS) soared 32.3% higher year over year to $2.21 during the fiscal first quarter. J.M. Smucker's improved operating efficiency led to lower cost of products sold and selling, distribution, and administrative expenses for the quarter. A resulting expansion in net margin coupled with share repurchases explains how adjusted diluted EPS growth significantly outpaced net sales growth in the quarter.
As J.M. Smucker continues to raise prices and adapt to consumer preferences, earnings growth should persist: Analysts predict the company's adjusted diluted EPS will rise by 6.7% annually for the next five years.
Image source: Getty Images.
The payout is unquestionably secure
Compared to the 1.5% dividend yield of the S&P 500 index, J.M. Smucker's 2.9% yield can provide shareholders with a healthy heaping of income. Better yet, the company looks poised to almost maintain the 7% annual dividend growth rate that it has delivered to shareholders in the last decade.
J.M. Smucker's dividend payout ratio is slated to register at approximately 43% for the current fiscal year ending next April. That allows the company to retain adequate capital to expand its operations, repay debt, repurchase shares, and hike the dividend. Thus, I anticipate that dividend growth will roughly mirror earnings growth for the foreseeable future.
An appealing value for dividend investors
Having gained just 1% in the past 12 months, shares of J.M. Smucker have largely been left out of the rally in the broader market. Paired with steady earnings growth, this has pushed the stock's forward price-to-earnings (P/E) ratio down to just 14.1. Seeing as that is below the packaged foods industry average forward P/E ratio of 14.8, J.M. Smucker is trading at a buyable valuation for income-focused investors at the current $143 share price.
