Streetwise for Sunday, November 18, 2018

As we approach the Thanksgiving holiday, 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 last wrote about the company a year ago my earnings estimate for the fiscal year ending April 2018 was $8.17 per share with a 12-month share price projection of $118. There was also an indicated dividend yield of 3.00 percent. 

So how did the company do? Earnings came in at $8.06 per share and the shares closed recently at $113.89. So, I was a bit light in my projections. Nonetheless, Smucker’s does merit ongoing consideration for inclusion in any large cap portfolio.

The company has achieved a return on equity (ROE) and return on invested capital (ROIC) that have averaged 10.6 percent and 7.7 percent respectively over the past decade. The debt load is conservative with an interest coverage of 5.6. Interest coverage is the ratio of a company’s earnings before interest and taxes divided by interest payments due within the same period.

Smucker’s has remained relevant because it is constantly adding new brands. While larger food giant Nestle has a recent distribution deal with Starbucks, Smucker’s has had a distribution deal with Dunkin’ Donuts (now called Dunkin) coffee in grocery stores since 2015.

Smucker works to keep its brand portfolio in line with consumer tastes with acquisitions such as Ainsworth Pet Nutrition in 2018, Sahale Snacks in 2014, or Rowland Coffee Roasters in 2011, to bring trendy upscale and healthy products into the portfolio.

However, the company is willing to undertake large transformational acquisitions such as its six-billion-dollar acquisition of Big Hearts Pet Brands in 2015, the company’s major entry into pet nutrition.

As a consumer staples company with many household brands, the company has had a profitable and growing past, with revenue and earnings per share growing at an average annual rate of 11.3 percent and 14.7 percent respectively over the past decade. In terms of profitability, Smucker has achieved high return on equity and return on invested capital that have averaged 10.6 percent and 7.7 percent over the past decade respectively.

The company has positive and growing cash flows, which indicates that it can maintain and grow its intrinsic value. However, with a recent share price of $109.50, the trailing twelve-month earnings per share multiple or P/E ratio is 10.05, implying low expectations by investors.

As a successful consumer staples company with many daily use brands in its portfolio, the company looks to be a candidate for virtually any portfolio.

While organic revenue growth appears to have stalled in recent years as consumers look for healthier choices, the company is keeping its portfolio of products fresh with small timely acquisitions. The debt load is reasonable and gives the company the ability to continue to support growth with those smaller acquisitions as part of its capital budget.

In the meantime, there are likely to be many additional years of dividend growth given the company’s commitment to do so and that dividends are well-covered by its free cash flow. Dividends have been increasing for 20 consecutive years with an average growth rate of 10 percent over the past ten years.

The intrinsic value of the shares using a free cash flow to the firm model is $125. My earnings estimate for the 2020 fiscal year ending April 2019, is $8.40 per share with a 12-month share price projection of $124, yielding a 10 percent capital gain. There is also an indicated dividend yield of 2.98 percent.

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.RuddInternational.com.