Streetwise for Sunday, November 19, 2017

In a recent column, I discussed how at the end of each year I offer up 12 investment ideas, the performance of which I then review a year later. The list is designed to be a catalyst to stimulate ideas and thinking on your part about potential investment candidates and is not a suggested portfolio.

I appreciate the interest and value many of you seem to place on the list. However, to those who requested a copy in advance; you know that would spoil the surprise and maybe sell less newspapers.

Now I know what you are thinking…how about just one investment idea to go with your Thanksgiving turkey. OK, the company that always comes to mind this time of the year is J.M. Smucker (SJM). Most of you probably know the company for its jam and peanut butter. Yet, it receives more revenue from coffee and pet food than from either of those two products.

Smucker’s portfolio also includes items such as shortening and oils, baking mixes and ready-to-spread frostings, canned milk, flour and baking ingredients, juices and beverages, frozen sandwiches, toppings, syrups, and pickles and condiments.

When I wrote about the company a year ago my earnings estimate for the fiscal year ending April 2017 was $7.65 per share with a 12-month share price projection of $145. There was also an indicated dividend yield of 2.36 percent. 

So how did the company do? Earnings came in at $7.72 per share and the shares closed recently at $108.19. So, I was light in terms of share price due to a less than ebullient revenue projection for the 2019 fiscal year.

A stock-price decline of almost 20 percent this year has pushed Smucker’s dividend yield up to its highest level since the 2008 recession. If you have a long-term investment horizon, you might want to consider taking advantage of that slump. After all, shares of this branded-food-products specialist now yield 3 percent, compared to 2 percent for the broader market.

Yes, the company is currently facing substantial growth challenges as discount and private-label brands chip away at the Smucker’s market-share positions. However, Smucker’s brings some impressive assets to the fight.

Three-quarters of Smucker’s sales come from categories like coffee, where it holds the number one or number two spot in the market. And the coffee division is seeing improving trends, because of robust pricing and expectations for lower coffee costs. For example, Arabica prices in November have dropped 22 percent from a year ago.

The pet food division has seen sales improvement and volume growth, and the company could capitalize on recent momentum by acquiring a natural pet food brand to add to its portfolio.

Smucker’s discounted share price, versus its peers, does not reflect the fact that 70 percent of earnings come from the coffee and pet food segments. This would imply the stock’s discount to its peers is excessive.

Smucker’s management may have set a low bar in its revenue projections, which implies actual earnings are likely to be higher in the near-term and any future guidance cuts are “unlikely. Keep in mind that the company controls a deep portfolio of franchises, given that you can find at least one of its products in nearly every household in the country.

Smucker’s is hoping to ride that brand strength to faster growth over time, as it adjusts its food offerings to match consumers’ demands for more convenience and better ingredients.

In the meantime, many more years of dividend growth is likely given, Smucker’s current annual commitment and the fact that dividends are well-covered by its free cash flow.

The intrinsic value of the shares using the ValuePro.net free cash flow to the firm model is $147. My earnings estimate for the 2019 fiscal year ending April 2018, is $8.17 per share with a 12-month share price projection of $118, yielding a 10 percent capital gain. There is also an indicated dividend yield of 3.00 percent.

Note that Smucker has been increasing dividends for 19 consecutive years with an average growth rate of 9.55 percent over the past ten years.

Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com. Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to www.RuddReport.com.