Dividend Investor Portfolio #25: Sweet Deal
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Dear Investor,
Welcome to the 25th edition of TipRanks’ Dividend Investor Portfolio & Newsletter.
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Market-Moving News: September 9, 2024
Stocks ended the short, brutal week with widespread losses. The S&P 500 (SPX) tumbled 4.25%, marking its worst week since the regional banking crisis in March 2023. The Dow Jones Industrial Average (DJIA) fell by 2.93%. Meanwhile, the tech benchmarks Nasdaq Composite (NDAQ) and Nasdaq-100 (NDX) lost 5.77% and 5.89%, respectively, with the latter registering its worst week since 2022.
Last week was all about the deteriorating job market. The JOLTS data showed July’s job openings fell to their lowest since the start of 2021; the ADP data reflected the slowest pace of private job growth since 2021 as well. In addition, Friday’s report showed that payrolls rose at a much slower rate than was anticipated, although this still represented an increase from a sharply revised July figure.
The apparent cooling of the labor market was the main source of anxiety. There was a sharp increase in speculations that the Fed could be behind the curve as it performs its widely anticipated policy easing this month, with many calling for a 0.5% cut.
On the other hand, different parts of the jobs report reflected continued strength, maintaining hopes for a soft landing. Thus, the unemployment rate ticked down to 4.2% from July’s 4.3%. In addition, average weekly hours rose as expected, while average wages increased above expectations. On the whole, the latest reports confirmed a softening job market. This is sufficient to support rate cut expectations, though not enough to strongly imply a 50bps rate reduction.
On the other hand, the Federal Reserve rate committee doesn’t meet in October, leaving a large gap between the September and November meetings. This does not leave sufficient time for the Fed to respond if there is a further deterioration in labor conditions. Thus, the policymakers face a tough decision: to reduce rates by 0.25% and risk a stalling job market and a recession, or by 0.50% and risk rekindling inflation.
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This Week’s Quality Dividend Stock Idea
The J.M. Smucker Co. (SJM) is a manufacturer of food and beverage products, as well as pet food products. The company offers a large portfolio of consumables, including coffee, peanut butter, fruit spreads, frozen foods, sweet baked goods, and more, as well as dog snacks and cat food.
The company’s flagship brand, Smucker’s, produces fruit spreads, peanut butter, syrups, and ice cream toppings. SJM is also well-known for its Dunkin and Café Bustelo coffee, Hostess sweet baked snacks (including Twinkies), Uncrustables frozen sandwiches, Voortman cookies; Milk–Bone dog snacks, and Meow Mix cat food, among many others.
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Conservative Growth and Family Leadership
The J.M. Smucker Co. was founded in 1897 in Orrville, Ohio, as a family mill, producing homemade jam, cider, and apple butter. To this day, the company has been led by CEOs belonging to the Smucker family; its current CEO Mark Smucker is the fifth generation of Smucker family leadership.
Over 127 years, the company has conservatively maintained the same line of business, expanding only to adjacent food and snack business lines. SJM began its international expansion in the 1980s by acquiring brands in Canada, Europe, and Australia. In the U.S., the company increased its portfolio brand offerings through acquisitions, such as the Folgers coffee brand in 2008, Sara Lee’s coffee and tea operations in 2011, Big Heart Pet Brands in 2015, and Hostess Brands in 2023. Over the years, the company also divested some non-core business lines as a part of its strategy of focusing on pet food, coffee, and snacks.
The J.M. Smucker Company’s stock began publicly trading on the NYSE in 1965 and was added to the S&P 500 index in 2008. Today, with a market cap of $12.8 billion and annual revenues of $8.2 billion, SJM ranks #446 on the Fortune 500 list.
SJM derives over 85% of its revenues from the U.S. On the other hand, its revenue streams are highly diversified by business segment, with ~37% of revenues stemming from sales of pet food and snacks, over 36% from its coffee business, and the rest from sales of consumer food products.
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Dividend Aristocrat in the Making
The J.M. Smucker Co. has been paying dividends consistently each year since 1960, increasing them annually over the past 21 years. With over two decades of consistent dividend growth, SJM is a so-called “Dividend Contender” (a company that has paid dividends for over 10 years, but less than the 25 needed to become an Aristocrat).
In the past decade, SJM’s dividend has grown at a CAGR of ~6%. Its current dividend yield stands at 3.75%, significantly higher than the average for the Consumer Staples sector.
The latest dividend increase was in August 2024, when the quarterly payout was hiked by 2%. Even though its yield is already appreciably high, J.M. Smucker is expected to continue raising payouts at a solid annual clip of 2-3%, with this outlook supported by the company’s moderate dividend payout ratios and robust earnings growth prospects.
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Working to Return to Robust Growth
Over the past decade, SJM’s revenues have increased at a CAGR of ~4.5%, while its earnings-per-share have risen at a CAGR of 8.5% – a healthy clip for a Consumer Staples company. However, in the years after the pandemic, the rates of growth stalled due to the increased health consciousness of consumers and the negative effect of inflation on sales.
Smucker’s iconic brands continue to enjoy high recognition, while its solid management ensures that the company holds up exceptionally well during economic downcycles. However, a return to strong growth is another issue. SJM has been working to meaningfully increase growth rates, mostly through acquisitions.
Thus, in November 2023, J.M. Smucker completed the acquisition of baked goods company Hostess Brands in a cash-and-stock deal valued at $5.6 billion, which included debt. The company’s leverage has risen substantially due to the acquisition, though it remains under control as reflected in its investment-grade rating of “BBB” at S&P Global Ratings.
In addition, Smucker has been adjusting its portfolio towards higher-growth product categories, as well as those carrying higher barriers to entry for retailers’ private labels. Within this strategy, over the past year, SJM has divested from certain pet food brands that carried lower margins, concentrating on product categories where the company is a market leader. Its dog-snack business holds a 23% market share in the U.S., and SJM intends to grow this line “to $1 billion in sales and beyond.” Another strong growth area is cat food, where Smucker holds the #1 position in the dry cat food market. SJM also plans to raise its Uncrustables brand to $1 billion in sales by the end of fiscal 2026.
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Sweetening the Deal
The high value of the Hostess acquisition weighed on investor sentiment towards the company, as they worried over the possibility of stock dilution to fund debt reduction, as well as over SJM’s ability to quickly capitalize on the acquisition. The company did dilute shareholders in the past year, but the share count increased by a mere 4%. The company said it intends to leverage its strong cash flows to repay $500 million of debt in this fiscal year and each of the next two years.
The solid results of Smucker’s fiscal Q1 2025 (ended on July 31, 2024) suggest that it continues to successfully integrate its acquired brands. Thus, virtually all of the FQ1’s 18% year-over-year increase in net sales was due to the sales growth of the Hostess Brands. The company said that the reasoning behind the acquisition was that “70% of consumers have two snacks per day,” making it the right place to be for a food company eyeing faster growth; these results vindicate the Hostess deal’s high price tag.
In FQ1, the company reported a 10% year-on-year increase in adjusted EPS, beating analyst estimates by a wide margin, a 29% jump in adjusted gross profit, and a surge of 35% in adjusted operating income. Despite these strong results, Smucker lowered its full fiscal year 2025 sales and profit guidance, as inflation and economic uncertainty led consumers to tighten their belts, with demand growth weakening in discretionary categories such as pet treats and sweet baked snacks.
The revised guidance calls for net sales growth of 8.5% to 9.5%, 1% lower at the midpoint than the previous outlook. The EPS for the fiscal year is now expected to range from $9.60 to $10.00, slightly lower than the previous $9.80 to $10.20 range. Longer term, the company sees a strong potential for sales growth within its snack categories, driven by Americans’ food habits, adding that SJM doesn’t see any meaningful impact from the anti-obesity drugs on its products.
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Value Proposition
At first, investors reacted negatively to the company’s lower guidance, with the company’s stock extending its 12-month decline to over 15%. However, SJM shares have seen a strong rebound recently, helped by sector rotation into more defensive stock categories. The company’s earnings history—particularly EPS results outpacing analyst expectations in each and every quarter—suggests that it may continue positively surprising investors in the future.
The stock’s value proposition remains in place as valuations are very attractive. SJM’s shares trade significantly below the average for the Consumer Staples sector and come in near the bottom of the price range for its peers in the U.S. Food industry. Moreover, based on its forecasted cash flows, J.M. Smucker appears undervalued by about 65%.
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Investing Takeaway
J. M. Smucker Co. is a solidly managed company with great prospects of returning to robust growth rates, as it focuses on products that are always in demand. The savvy business strategy, coupled with its long and flawless dividend track record and very attractive valuation, makes SJM a valuable addition to long-term income portfolios.
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Dividend Investor Portfolio
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Portfolio News
¤ BlackRock (BLK) goes ex-dividend today, September 9th. In other company news, the U.S. regulators approved BLK’s acquisition of Global Infrastructure Partners, the world’s largest independent infrastructure fund manager.
¤ Automatic Data Processing (ADP) will go ex-dividend on September 13th.
¤ Kroger (KR) is scheduled to report its Q2 2024 earnings on September 12th.
¤ Qualcomm (QCOM) has explored options regarding a buyout of parts of Intel’s chip-design business, according to a Reuters report. Qualcomm, the highly profitable mobile semiconductor giant, is aiming to expand its product portfolio, and the sale could also help Intel find ways to stop its financial freefall.
¤ JPMorgan Chase & Co. (JPM) has filed with the SEC for the launch of a new exchange-traded fund, the JPMorgan Flexible Income ETF. The fund will invest broadly in income-producing securities globally, such as corporate debt, equities, loans, etc. JPMorgan currently manages 64 U.S.-traded ETFs with total AUM of $166 billion.
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Recent Trades
None at the moment, although we are constantly evaluating stocks for a possible addition to the portfolio. Stay tuned.
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Portfolio Attributes
| Dividend Portfolio Yield |
Expected Dividend Growth | Expected Annual Income |
| 3.64% | +10.19% | $3,821.72 |
| Yield-on-Cost Adjusted, Weighted |
Average Analyst 12-Month Growth Outlook | 10K Per Stock at the Time of Purchase |
Current Portfolio
| Name | EX-Dividend Date | Payment Date | Yield on Cost | Annual DPS |
| Automatic Data Processing (ADP) | Sep 10, 2024 | Oct 03, 2024 | 2.16% | $5.60 |
| Allianz SE ADR (ALIZY) | May 08, 2025 | May 13, 2025 | 5.25% | $1.50 |
| Amgen (AMGN) | Nov 15, 2024 | Dec 06, 2024 | 2.62% | $9.00 |
| BlackRock (BLK) | Sep 09, 2024 | Sep 23, 2024 | 2.41% | $20.40 |
| Edison International (EIX) | Sep 27, 2024 | Oct 31, 2024 | 3.97% | $3.12 |
| EOG Resources (EOG) | Oct 17, 2024 | Oct 31, 2024 | 3.95% | $3.64 |
| JPMorgan Chase (JPM) | Oct 05, 2024 | Oct 31, 2024 | 2.04% | $4.60 |
| Kroger (KR) | Nov 15, 2024 | Dec 01, 2024 | 2.12% | $1.28 |
| LyondellBasell (LYB) | Nov 24, 2024 | Dec 04, 2024 | 5.27% | $5.36 |
| Philip Morris (PM) | Sep 12, 2024 | Oct 10, 2024 | 4.59% | $5.20 |
| Qualcomm (QCOM) | Sep 05, 2024 | Sep 26, 2024 | 1.85% | $3.40 |
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Click here for more stock market analysis from TipRanks Macro & Markets research analyst Yulia Vaiman
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Disclaimer
The information contained in this article represents the views and opinions of the writer only, and not the views or opinions of TipRanks or its affiliates and should be considered for informational purposes only. TipRanks makes no warranties about the completeness, accuracy, or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment, and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. TipRanks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by TipRanks or its affiliates. Past performance is not indicative of future results, prices, or performance.
