Monday, July 24, 2017

J.M. Smucker (SJM) Rewards Shareholders With a Raise

The J. M. Smucker Company (SJM) engages in manufacturing and marketing branded food products primarily in the United States, Canada, and internationally. The company is a member of the dividend achievers index. The company’s largest competitors include Conagra (CAG), Kraft Heinz (KHC) and Hershey (HSY).

The Board of Directors approved a 4% dividend increase last week, bringing the quarterly payment to 78 cents/share. This marked the 20th consecutive annual dividend increase for this dividend achiever.

This was the slowest dividend increase since the 4.70% dividend hike in 2015. Over the past decade, this company has managed to boost annual dividends at a rate of 9.80%/year. A small dividend hike shows that management is cautious about near term prospects for the business.

The company has managed to grow earnings per share from $3/share in 2008 to $5.10 in 2017. Analysts expect J. M. Smucker to earn an adjusted EPS of $8.35 per share in 2018. In comparison, the company earned an adjusted $7.72/share in 2017, which was down from the adjusted $7.79/share in 2016.

Under GAAP, J.M. Smucker earned $5.10/share in 2017. However, the company also shows adjusted earnings per share, which they believe to be closer to the true operating performance of the business. This adjusted amount excludes things like amortization for finite-lived intangible assets as well as impairments. At the current rate, we could expect a $200 million non-cash charge every year for the next 22 years. This is the weighted-average useful life of total finite-lived intangible assets is 22 years. This will depress near term earnings by a little less than $1.80/share for two decades. This is something to take into account when looking at measuring earnings power. I still use GAAP EPS numbers for historical comparison purposes, in order to evaluate how a business has done over a longer period of time. Unfortunately, the company has only provided adjusted earnings per share using the current formula that only go as far back as 2012. J.M. Smucker earned $5.31/share in adjusted earnings in 2012, which was equivalent to $4.06/share. As the company makes more acquisitions, these amortization charges may even increase over time.

The company has grown by acquisitions over the past decade. This could likely continue in the future. The most recent acquisition was that of Big Heart Pet Brands in 2015. However, we also want to have organic growth in revenues and earnings to further boost our shareholder wealth and income. While the items sold by Smucker are sticky products, which generate recurring revenues from customers, we want to evaluate whether those relationships hold in the future. We seem to operate under a more competitive environment, where customers are also getting more health conscious.

J.M. Smucker also regularly does share buybacks. The company dilutes existing shareholders by issuing shares in its acquisitions however, which is why the number of shares outstanding has increased slightly over the past five years. The number of shares outstanding is slightly lower than the number from 2008.

Currently, J. M. Smucker looks overvalued at 23 times 2017 GAAP earnings, but looks attractive at 15.30 times adjusted earnings. The stock yields 2.60%. The dividend payout ratio is at 61% using EPS  and at 40% using adjusted earnings per share. The dividend is safe, because there is more than enough margin of safety in dividends from earnings. I believe that this is an attractively valued business for long-term investors who are willing to patiently sit on it for years.

Full Disclosure: Long SJM, NSRGY, KHC

Relevant Articles:

- J. M. Smucker (SJM) Dividend Stock Analysis
Dividends versus Share Buybacks/Stock repurchases
Dividend Achievers Offer Income Growth and Capital Appreciation
Margin of Safety in Dividends
How to value dividend stocks

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