Each year, we individually review all the Dividend Aristocrats. The next in the series is The J.M. Smucker Company (SJM). J.M. Smucker has a long history of dividend growth, having raised its dividend for 26 years in a row. This article will discuss the major factors for J.M. Smucker’s long dividend history and its outlook.

Business Overview

J.M. Smucker (SJM) has been in business for more than 100 years. It started out all the way back in the 19th century when the company was founded in 1897 at a small cider mill in Orrville, Ohio.

Today, J.M. Smucker has a market capitalization of $16 billion and generates annual revenue of more than $8 billion. J.M. Smucker is a packaged food and beverages company that owns well-known brands such as Smucker’s, Jif, Folgers, and so on. The company also owns a pet food business with brands such as Milk Bone and 9Lives.

Growth Prospects

J.M. Smucker’s industry isn’t growing fast, as demand for food is not growing too much based on economic development. Instead, food consumption is generally growing a little less than economic output, as it is mostly tied to population growth. Still, J.M. Smucker can generate growth in different ways, despite being active in a lower-growth industry.

Acquisitions have been a major source of business growth for the company in the past:

Source: Investor Presentation

The company regularly acquires smaller companies that are then benefitting from J.M. 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 J.M. Smucker acquires.

Source: Investor Presentation

Acquisitions in the past included the Big Heart Pet Brands acquisition in 2015, which allowed the company to enter the pet food market in force. The pet food market is growing faster than the food and beverages market, thus acquisitions in this area boost J.M. Smucker’s organic growth outlook. Price increases are another source of revenue growth, as this allows J.M. Smucker to grow its top line more than volume growth alone would do.

The company reported its most recent quarterly results in November, showcasing revenue growth of 8% year over year. Organic sales growth was even better, at 11%, mainly thanks to price increases, but currency rate movements (a strengthening US Dollar) made J.M. Smucker’s reported top line grow a little less than the organic sales performance suggests.

J.M. Smucker saw its earnings-per-share decline marginally, however, by 1%, as earnings-per-share dropped from $2.43 to $2.40, due to commodity cost inflation that pressured the company’s margins.

In the long run, we believe that current margin headwinds from rising commodity prices will wane, or that the company will fully pass on those rising costs to consumers. Some organic business growth, some M&A, and the impact of share repurchases should allow J.M. Smucker to grow its earnings-per-share by around 5% a year in the long run, we believe.

Competitive Advantages & Recession Performance

J.M. Smucker is not the largest player in the food and beverages space by far, but it is among the leading players in the segments it is active in, such as coffee sold at retailers, peanut butter and other breakfast spreads, pet food, and so on.

J.M. Smucker’s brands are well-known and liked among consumers, thus it is not very likely that new market entrants will disrupt the company’s core business. There is, however, a disadvantage when it comes to the health aspect of foods. J.M. Smucker’s offerings aren’t very healthy on average, thus the company is exposed to headwinds from consumers shifting some of their spending from the more traditional foods J.M. Smucker offers to healthier alternatives.

A major advantage for J.M. Smucker is its outstanding recession resilience. Consumers do cut back on their spending during economic downturns, but they do so in discretionary areas — autos, electronics, apparel, and so on. They generally don’t really cut their spending on food and beverages, which is why J.M. Smucker and most of its peers have outperformed during recessions in the past.

The company’s earnings-per-share performance during the Great Recession is below:

• 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 J.M. Smucker did not only manage to grow its earnings-per-share during every year of the Great Recession, but it even generated a very compelling average growth rate of 15% in that time frame — barely any other company has managed to perform so well during the crisis.

The same held true during the pandemic, as J.M. Smucker also managed to grow its earnings-per-share by 14% in 2020 when the economy was suffering from lockdowns and other COVID measures.

J.M. Smucker’s recession resilience is one of its biggest advantages and makes it a suitable choice from a risk perspective.

Valuation & Expected Returns

Using the current share price of ~$150 and the midpoint for earnings guidance of $7.00 for the year, J.M. Smucker trades for a price-to-earnings ratio of 21.4. Given the company’s strong recession performance, but not overly strong growth outlook, we feel that a target price-to-earnings ratio of 16 is appropriate. This is also roughly in line with the company’s 10-year historical average.

As a result, J.M. Smucker is currently overvalued. Returning to our target price-to-earnings ratio by 2028 would reduce annual returns by around 5% over this period of time. Aside from changes in the price-to-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, J.M. Smucker stock is currently trading with a dividend yield of 2.7%.

Total returns could consist of the following:

• 5% earnings growth
• -5% multiple reversion
• 2.7% dividend yield

J.M. Smucker is thus expected to return around 3% per year through 2028. This isn’t compelling, which is why we rate J.M. Smucker a “Sell” today, despite the company’s strong recession resilience and dividend growth track record.

Final Thoughts

J.M. Smucker is a quality company with a strong dividend growth track record and an outstanding ability to withstand recessions and other macro crises.

But shares are trading well above our fair value estimate right now, which is why we do not expect J.M. Smucker to generate compelling total returns going forward. The current dividend yield is very solid and looks safe, but due to expected total returns being only in the 3% range over the coming years, we rate J.M. Smucker a sell at current prices.

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