Published July 17th, 2015
What goes better than peanut butter, jelly, and… Coffee?
J.M. Smucker’s (SJM) portfolio includes the Smucker’s jelly, Jif Peanut Butter, and Folger’s coffee brands, among others.
J.M. Smucker has a long corporate history. The company was founded in 1897 and paid increasing dividends for 16 consecutive years. This makes J.M. Smucker a member of the exclusive Dividend Achievers index.
The company operates in 4 segments. The percentage of total operating income each segment has generated during the company’s fiscal 2015 is shown below:
- S. Retail Coffee: 47.8% of total operating income
- S. Retail Consumer Foods: 37.7% of total operating income
- S. Pet Foods: N/A, loss
- International, Food Service & Natural Foods: 14.5% of total operating income
About 85% of J.M. Smucker’s operating income is generated in the United States. Coffee is the largest contributor to profit for J.M. Smucker, despite the company being named after a jelly brand. J.M.Smucker’s coffee brands include: Folger’s, Café Bustelo, Pilon, and Millstone. In addition, J.M. Smucker sells coffee under the Dunkin’ Donuts brand in grocery stores across the U.S.
Do not be fooled by the company’s reported loss in the U.S. Pet Foods division. The segment had just 6 weeks of operations at the close of J.M. Smucker’s fiscal 4th quarter. The U.S. Pet Foods division consists of recently acquired Big Heart Pet Brands.
Big Heart owned the Meow Mix, Kibbles N’ Bits, Milk Bone, and 9 Lives brands, among others. The acquisition makes J.M. Smucker the leader in the U.S. pet snacks market. This segment currently generates about 30% of J.M.Smucker’s revenue. The segment will be a significant driver of profits in the company’s coming fiscal year.
Total Return & Growth Prospects
J.M. Smucker’s long-term growth goal is 8% earnings-per-share growth per year. The company has grown earnings-per-share at 8% a year over the last decade; the company’s goal is not a stretch.
J.M. Smucker is expecting long-term revenue growth of around 6% a year. Revenue growth will come from organic growth (3% to 4%) and acquisitions (2% to 3%). Earnings-per-share are expected to grow faster than revenue due to a mix of share repurchases and efficiency improvements.
Most businesses do not target growth from acquisitions. J.M. Smucker has an excellent track record over the last 13 years of growing company value through acquisitions. The image below shows this history.
The Big Hearts acquisition is the latest in a long line of successful acquisitions for J.M. Smucker. J.M. Smucker acquired Big Hearts for $5.8 billion. It was financed as follows:
- $1.3 billion in short term borrowings
- $1.9 billion in new share issuance
- $2.6 billion in debt assumption
The deal should be mildly accretive to earnings-per-share in fiscal 2016 (started May 1st, 2015) for J.M. Smucker. The acquisition is expected to grow earnings-per-share by 10% in both fiscal 2017 and 2018; strong growth above management’s long-term goals.
In addition to J.M. Smucker’s expected earnings-per-share growth rate of 8%, the company also has a dividend yield of 2.4%. J.M. Smucker’s dividend yield combined with its 8% growth rate gives the company an expected total return of around 10.4% a year going forward.
Recent Weakness & Valuation
J.M. Smucker struggled in fiscal 2015. Adjusted earnings per share fell 4.1% for J.M. Smucker in fiscal 2015. The vast majority of losses were due to weakness in the company’s U.S. Coffee segment – which saw operating income decline 14% in fiscal 2015 versus fiscal 2014.
Simply put, J.M. Smucker’s coffee segment underperformed. The segment struggled due to ‘competition’ and higher coffee prices. The coffee segment’s revenue declined 4%, while operating margins fell from 29.6% in fiscal 2014 to 26.5% in fiscal 2015.
Recent weakness has caused J.M. Smucker’s share price to fall from a high of around $120 to $107. The company is currently trading at a price-to-earnings ratio of 19.9. J.M. Smucker now appears to be trading around fair value given its double-digit expected total returns and strong brands in slow changing industries.
Safety & Recession Performance
J.M. Smucker took on a significant amount of debt with its acquisition of Big Hearts. The company currently has about $6.2 billion in debt on its balance sheet, with just $126 million in cash. The company is expected to have an annual interest expense of around $120 million versus adjusted operating income of $859 million in its most recent fiscal year.
J.M. Smucker is not in danger of bankruptcy, but the company does plan to use a large portion of its cash flows to pay off debt. This will help to reduce the company’s interest expense as well.
The Great Recession of 2007 to 2009 turned out to be a growth period for J.M. Smucker. When recessions occur, consumers cut back on their $5 lattes and switch to cheaper alternatives – like Folger’s. This helps J.M. Smucker to prosper during recessions. The company saw earnings-per-share grow each year through the Great Recession.
J.M. Smucker ranks highly using The 8 Rules of Dividend Investing. The company offers an above-average yield with safety and solid growth prospects. The company’s combination of attractive total returns and safety even has some dividend investors saying it’s their civic duty to inform fellow investors about the company.
J.M. Smucker should see double-digit earnings-per-share growth in its next few years as it realizes synergies from the recent Big Hearts acquisition. The company appears fairly valued at current prices and will make a solid addition to a dividend growth portfolio.