Introduction

The J.M. Smucker Company (SJM) is a “Dividend Contender” that has increased its dividend for 20 consecutive years.  After being overvalued for most of fiscal year 2017 (fiscal year ends in April) the company has since fallen into attractive valuation territory.  As a result, the company is available at a low P/E ratio relative to historical norms and offers a current dividend yield of 2.9%.  Moreover, the company has consistently increased its dividend in line with its historical 10% earnings growth.

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J M SMUCKER

About The J.M. Smucker Company

 

The J. M.  Smucker Company: Long business description courtesy S&P Capital IQ:

“The J. M. Smucker Company engages in manufacturing and marketing branded food and beverage products on a worldwide basis.

The majority of the company’s sales are in the U.S. Its operations outside the U.S. are principally in Canada, although products are exported to other countries as well. The company’s branded food and beverage products include a portfolio of primary brands that are sold to consumers through retail outlets in North America.

The company has three segments: U.S. Retail Coffee, U.S. Retail Consumer Foods, and U.S. Retail Pet Foods. The U.S. retail market segments represent a major portion of the company’s strategic focus – the sale of branded food and beverage products with primary positions to consumers through retail outlets in North America. Within the company’s segment results, International and Foodservice represents a combination of the strategic business areas not included in the U.S. retail market segments.

Principal Products

The company’s principal products are coffee, pet food, pet snacks, peanut butter, fruit spreads, shortening and oils, baking mixes and ready-to-spread frostings, frozen sandwiches, flour and baking ingredients, juices and beverages, and portion control products.

In the U.S. retail market segments, the company’s products are primarily sold through a combination of direct sales and brokers to food retailers, food wholesalers, drug stores, club stores, mass merchandisers, discount and dollar stores, military commissaries, natural foods stores and distributors, pet specialty stores, and online retailers. In International and Foodservice, the company’s products are distributed domestically and in foreign countries through retail channels and foodservice distributors and operators (restaurants, lodging, schools and universities, and health care operators).

Customers

Sales to Wal-Mart Stores, Inc. and subsidiaries amounted to 30 percent of net sales in 2017. These sales are primarily included in the U.S. retail market segments.

Trademarks and Patents

The company’s major trademarks are as follows:

U.S. Retail Coffee: Folgers, Dunkin’ Donuts, and Café Bustelo.

U.S. Retail Consumer Foods: Jif, Smucker’s, Crisco, Pillsbury, and Uncrustables.

U.S. Retail Pet Foods: Meow Mix, Milk-Bone, Natural Balance, Kibbles ‘n Bits, 9Lives, Pup-Peroni, and Nature’s Recipe.

International and Foodservice: Folgers and Smucker’s.

Slogans or designs considered to be primary trademarks include, without limitation, ‘With A Name Like Smucker’s, It Has To Be Good’; ‘The Best Part of Wakin’ Up Is Folgers In Your Cup’; ‘Choosy Moms Choose Jif’; ‘Purely The Finest’; ‘Goodness Gracious, It’s Good’; ‘The Only One Cats Ask For By Name’; ‘Say It With Milk-Bone’; the Smucker’s banner; the Crock Jar shape; the Gingham design; the Mountain Grown design; and the Smucker’s Strawberry, Milk-Bone, and 9Lives logos.

Seasonality

The U.S. Retail Coffee and U.S. Retail Consumer Foods segments are particularly seasonal around the Fall Bake and Holiday period, which results in higher sales and profits in the company’s second and third quarters (year ended April 2017). The company’s success in promoting and merchandising its coffee and baking brands during the Fall Bake and Holiday period has a major impact on its results for a fiscal year.

Research and Development

Amounts expensed for the company’s research and development were $58.1 million in 2017.

Competition

As of April 30, 2017, the company’s major competitors were as follows:

U.S. Retail Coffee: The Kraft Heinz Company; Massimo Zanetti Beverage Group; F. Gaviña & Sons, Inc.; JAB Holding Company; Starbucks Corporation; and Tata Global Beverages Limited.

U.S. Retail Consumer Foods: Hormel Foods Corporation; Ferrero SpA; Conagra Brands, Inc.; Welch Foods Inc.; General Mills, Inc.; and Pinnacle Foods Inc.

U.S. Retail Pet Foods: Nestle Purina PetCare Company; Mars, Incorporated; Ainsworth Pet Nutrition; Blue Buffalo Pet Products, Inc.; and Hill’s Pet Nutrition, Inc.

International and Foodservice: Societe des Produits Nestle S.A.; The Kraft Heinz Company; and Restaurant Brands International Inc.

History

The J. M. Smucker Company was founded in 1897. The company was incorporated in Ohio in 1921.”

Debunking the Dividends Don’t Add Value Myth

In my most recent article covering Costco found here there was a lively discussion debating whether dividends provide investors value or reduce it.  Personally, I find these debates on the value of dividends unproductive and mostly off the mark.  I’ve written about this extensively in the past, what follows next are excerpts of my past thoughts:

When competent management teams find themselves with cash that they don’t need to grow their business, it can be a wise decision to distribute it to their shareholders, and the act of doing so does not automatically reduced the value of the company. In fact, and I contend in most cases, it can have the effect of increasing future value, because it does not dilute the returns on invested capital that the company requires to grow.

Furthermore, there is no evidence supporting the notion that higher retained earnings will always result in higher expected future earnings. On the other hand, there are multitudes of evidence showing that companies that retained earnings they did not need often destroyed future shareholder value.  This destruction of shareholder value often comes in the form of ill-advised acquisitions or investments that reduce returns on invested capital.  Additionally, long-term shareholder destruction results when managements invest outside of their respective businesses’ core competencies.

With the above said, the primary point that this section of my article will address is the debunking of the “dividends don’t matter myth.” This myth is perpetuated by those who contend that dividends are irrelevant, because somehow in their mind’s eye a company has become permanently (emphasis added is mine) less valuable by precisely the amount of the dividend that they paid out to shareholders. Moreover, they primarily base this judgment on the fact that a company’s share price will be adjusted by the dividend amount on the ex-dividend date. To be fair, I submit that those that take this position are in some respects technically correct; however, as I will show later, there is also a practical side to this as well. Courtesy of the Securities and Exchange Commission, here is their explanation of ex-dividend dates:

“Ex-Dividend Dates:

When Are You Entitled to Stock and Cash Dividends

Have you ever bought a stock only to find out later that you were not entitled to the next cash or stock dividend paid by the company? To determine whether

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