Portfolio Update
The FiveTwenty portfolio received $65.87 in dividends in the past week. AFL, ENB, and ADM payed their quarterly dividends during the week.
| Past Week Dividend | $65.87 |
| Current Quarter Dividend | $65.87 |
| Estimated Annual Dividend | $678.63 |
| LifeTime Dividend | $65.87 |
The capital allocation for the week of 03/07/2021 to 03/13/2021 will be used to establish a position in J.M Smucker (NYSE: SJM)
SJM – Company Profile
J.M. Smucker (SJM) is manufacturer and marketer of food and beverage products worldwide. The company operates in four segments: US Retail Pet Food, US Retail Coffee, US Retail Consumer Foods, and International and Away From Home. Some of the company’s best known brands are: Kibbles ‘n Bits, Meow Mix, Milk Bone (per food); Dunkin’, Folgers (coffee); Jif, Smucker’s, Bick’s (consumer foods). Official Site | Wikipedia
| Dividend Streak | 23 years |
| Yield | 3.04% |
| Payout Ratio | 36.50%* (reported 42.86%) |
| P/E | 12.10* (reported 14.09) |
* computed using TTM adjusted earnings of $9.78
Financials
Does SJM have the financial means to sustain and raise its dividend going forward?
Over the 9 years, SJM has grown revenue from $5.5 billion to $7.8 billion. A big contributor to the revenue growth was the 2015 acquisition of Big Heart Pet Brands. Over the same period net income grew from $456 million to $775 million.
From financial year 2013 to 2020, SJM had an average growth rate for adjusted EPS of 8.16% per year. EPS growth was more consistent than both revenue and income over the the period. The company achieved this higher consistency by buying back shares and improving operational efficiency.
The average dividend per share growth rate was 9.30% per year in the past 10 years and 6.10% per year in the past 3 years. (per GuruFocus) However, the dividend growth has not resulted in an expansion of the payout ratio. On an adjusted EPS basis, SJM has maintained a payout ratio between 38% and 48%. And if we exclude 2015 & 2016, the payout ratio has been in the 38% to 42% range.
In 2020 SJM posted strong financial results despite the COVID-19 pandemic, proving once again the resiliency of its business model. For the first 3 quarters of FY 2021 ended January 31, 2021 revenue grew 7% and adjusted net income and adjusted EPS grew 16%. Following the strong Q3 results, the company updated its full-fiscal 2021 outlook. It increased the revenue growth guidance to 2% from 0%-1%, and adjusted EPS range to $8.70 – $8.90 from $8.35 – $8.65. The year over year revenue growth guidance reflects the lapping of Q4 2020 results were positively impacted by COVID-19, as well as loss of noncomparable sales due to the divesture of the Crisco and Natural Balance business in Q3 2021.
Valuation
Are we paying too much for SJM at the current share price?
In the last 10 years, SJM’s P/E ratio saw a low of 7.97 and a high of 38.78, with a median value of 19.41. (per GuruFocus) The TTM P/E ratio based on reported earnings was 14.09. The TTM P/E ratio based on adjusted earnings was 12.10. Both values are considerably below the historical median.
The current share price of $118.34 is 2.6% above the 50-day moving average and 4.3% above the 200-day moving average. Additionally, the share price is near the 70th percentile of the 52 week trading range.
The current P/E ratio for SJM values the company at a much lower multiple compared to historical values. This presents an interesting opportunity for initiating a position.
Yield
How does the current dividend yield for SJM compare to historical values?
In the last 10 years, the dividend yield for SJM has been in a range of 1.73% to 3.4%, with a median of 2.33%. The current TTM yield of 3.04% is materially above the historical median. It is in fact closer to the all time high than the median.
The current yield makes this a highly attractive entry point for SJM. Additionally, the payout ratio in the low 40s should provide an extra margin of safety for the dividend.
Thesis
Why are we adding SJM to the FiveTwenty portfolio?
SJM has managed to consistently grow EPS and dividends over the last decade. This growth occurred during a period where most of is peers have struggled to produce any kind of growth.
Over the long term the company is targeting annual 2% to 3% sales growth, 5% adjusted operating income growth, and 8% EPS growth. To support the goal, SJM is refocusing its resources and portfolio toward pet food, coffee, and snacking. Given some of the headwinds the company and the industry as a whole is facing, such as consumers looking for fresher, healthier options, it is far from certain that the company will be able to deliver on those goals.
However, we believe that the current valuation and dividend yield offer good value even if the company were to fall short of its stated long term goals. Additionally, the current payout ratio should keep the dividend safe while the SJM works through is products portfolio adjustment.
Additional Research
- Dividend Stock Purchase: Bert’s Buys This Week | Seeking Alpha
- J. M. Smucker Stock: Show Growth Or Give Buybacks (NYSE:SJM) | Seeking Alpha
- 7 Top Food Stocks For 2019 & Beyond, Ranked In Order | Sure Dividend
- SJM 2019-02-26 (suredividend.com)
Photo by Jonathan Pielmayer on Unsplash
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