The J.M. Smucker Company has an iconic portfolio of consumer brands they’ve been building
for more than 120 years. It’s a fifth-generation family-run business that’s evolved into
multiple product categories, while consistently growing cash flow and dividends. In this video,
I’m going to provide a comprehensive overview of Smuckers’s current business and explain
why I think it’s a great value to add to your long-term dividend stock portfolio. (Intro)
My name is Zach and you should leave a like and subscribe to the channel if you enjoy
the video. You should never invest in a business you don’t understand, so today I’m going
to provide a full picture look at SJM stock. First, Let’s recap the company's history.
In 1897, Jerome Monroe Smucker founded the J.M. Smucker Company, selling homemade cider
and apple butter door to door from the back of his horse-drawn wagon. Family legend says
he used fruit from trees planted by Johnny Appleseed in the early nineteenth century.
Over time, the company would create multiple fruit spreads and became a nationally distributed
brand by 1942. They went public in 1959 and continued to grow through the acquisition
of new brands and the creation of innovative products.
So what does their business look like today? It can be broken into 3 main segments: Pet
Food, Coffee, and Consumer Foods. Pet Food is their largest segment, representing
36% of net sales. This includes brands like MilkBone, Meow Mix, Kibble n Bits, 9Lives,
Milo’s Kitchen, Natures Recipe, Pup-eroni, Rachel Ray Nutrish, and Snausages. Breaking
down this segment’s net sales, 34% comes from Dog Food, 30% from Cat Food, and 30%
from snacks. They have the number 1 market share in dog snacks at 24%, #2 in Cat food
at 18%, and #3 in dog food at 13%. Snacks is the fastest-growing segment in the pet
category and their top MilkBone brand puts them in a great position to capitalize on
this growth. Meow Mix is the #1 dry cat food brand in both household penetration and volume
share. Coffee is their second-largest segment at
29% net sales. It includes brands like Folgers, Dunkin at-home coffee, and Cafe Bustelo. These
are all retail brands with 50% of net sales being mainstream, 26% one-cup, 16% premium,
and 8% instant. They have #1 market share in the at-home coffee category, with 3 of
the top 10 brands. According to company research, 62% of Americans drink coffee, and 4 out of
5 cups are consumed at home. They are very well positioned in this category.
Consumer Foods is 20% of their net sales. It includes brands like Jif Peanut Butter,
Smuckers, Smucker’s Uncrustables, Sahales Snacks, Santa Cruz Organic, Adams, and Dickinsons.
They have #1 market share in peanut butter at 46% and #1 in fruit spreads at 42%. In
this segment, 46% of their net sales come from peanut butter, 20% from fruit spreads,
and 19% from frozen handhelds. Frozen handhelds represent their Smuckers’ Uncrustables brand,
which is an absolute powerhouse. It has had over 20% net sales compound annual growth
over the last 19 years and is on track to exceed $500 million by 2023.
So you should recognize most of these brands, especially if you live in the United States.
Now let’s try and gauge how their products are actually competing in both physical stores
and online. I took a trip to a local grocery store. You
can see Jif Peanut butter gets significant shelf space. Smucker’s is the top jelly.
They have many variations of both. Folgers coffee gets very large shelf space. Here you
can see some of their 1850 folder brand. Dunkin also gets significant space and I’d say
their packaging was some of the best in the aisle. Milk-Bone get’s huge shelf space
compared to other dog treats. You can also see Pup-eroni. Here you can see some Milo’s
Kitchen. Meow Mix gets huge shelf space. Smuckers also makes various dessert spreads and magic
shell. Now, this is just 1 store and it of course
varies at different locations and chains. Online is also a growing part of the shopping
environment. So let’s look at Amazon. On Amazon, if you search peanut butter, Jif
is one of the top results and in the brand section it’s listed number 1. If you search
Jelly, Smuckers is one of the top results and listed number 1 in brand. If you search
coffee, Dunkin comes up and Folgers is listed second in the brand section. It’s important
to remember that since these are established brands people often may search directly for
these as well. If you search for dog treats Milk-Bone comes up and is listed #1 in the
brand filter. If you search for dry cat food, then Meox Mix comes up multiple times and
is listed number 1 in brand. It’s also top-rated and amazon’s choice.
It’s important to remember that the top results in Amazon and many websites are often
sponsored. In my research for this video, I checked out the websites for Walmart, Kroger,
and Sam’s Club as well. The results were quite similar.
Whether online or in-store the environments are actually quite similar. It’s either
physical or digital shelf space. In both situations, consumer brands face the threat of private
label store brands. To fight this, you need to build brand recognition and get your product
in the mind of the consumer. You need to avoid commoditization of the product. I think Smucker’s
categories are suited to do this. In my opinion, it’s easier to market and differentiate
food, than something like toilet paper or paper towels. Also, there is a lot of value
in brands that remain popular for long periods of time, as they have built-in consumer recognition.
This helps form an economic moat around the business. I think Smucker’s core brands
are well-positioned here. They just need to continue marketing execution and making sure
they are being distributed everywhere for the consumer.
So now that you have a good idea of Smucker’s Business, let’s take a look at their financials.
To do so were going to be using the website I’ve been building. It’s not yet released,
but I’ve been working on it a lot and will be sure to make it known when it launches.
SJM stock is currently priced at $119.11 and valued just below $13 Billion. The stock price
has largely traded sideways over the last 5 years, despite consistent growth in earnings.
They actually just had a fantastic prior fiscal year, due to work-from-home environment. This
increased their at-home coffee business and caused a surge in pet adoption increasing
their pet food sales. I think a lot of this demand will stay long term. Work from home
has become far more common and people have built new habits. Also, all these new pets
are now customers for their entire lifespan. These were also growing categories prior to
the pandemic. Let’s look at some of their other financials.
Their revenue has been growing slowly for decades. If we look at their annual numbers
they’re currently at a 1.87 price-to-sales ratio based on their last fiscal. Their top-line
revenue growth seems slow, but they’ve been able to grow their free cash flow at a much
higher rate. Their Free Cash Flow per share has been consistently growing. In fiscal 2021
they earned $11.19 in Free Cash Flow per share. This is great, but maybe lower over the next
1-2 years. This is not due to a drop in sales, but increased cost-side inflation hurting
their profits. This is happening across so many different CPG companies. We can see its
impact in the 2 most recent quarters. Luckily, Smuckers does have pricing power in many categories
due to the strength of its brands. They actually just increased their prices on Jif peanut
butter due to cost increases, and the rest of the market followed their lead. Inflation
will definitely lower short-term earnings, but I don’t see it as a problem long-term.
We can see the effect of inflation in their margins as well. The past 2 quarters had 8.3%
and 7.66% net margins after an entire year ranging between 10-12.5%. With their balance
sheet, most debt is from acquisitions and I don’t think it will pose a problem to
the companies long-term objectives. Historically, they have not shown to consistently
do share buybacks. However, they have been buying back shares over the last 3 quarters.
A consistent share buyback program would definitely help total returns long term. In a recent
investor presentation, the company said they plan a balanced capital allocation strategy
with 50% going to investing in growth and 50% going toward dividends, share buybacks,
and debt repayment. Speaking of dividends, the company has been
consecutively increasing their dividends for 19 years. In fact, they just had a 10% dividend
increase. This brings their quarterly payout to $0.99 per share and an annualized forward
dividend of $3.96. This puts the current dividend yield at 3.32%, which is very solid. The current
payout ratio is around 46%, which gives plenty of room to grow the dividend over time. Over
the last 10 years, the compound annual growth rate of the dividend is 7.51%.
Personally, I think the company is trading at a discount right now. If we use my discounted
cash flow calculator, and put in conservative estimates for current FCF, growth rate, and
a discount rate of 10% then it says the stock is 42.73% undervalued. I made a video explaining
this process if you want to learn more about it.
Overall, I think SJM stock is a quality company and is undervalued in today’s market. However,
I don’t think this is something you should chase buying at higher valuations. Currently,
I own 17 shares of SJM, at an average cost of $121.28. I will likely continue buying
more at these prices but don’t take my advice blindly and be sure to do your own research
before making any investment decisions. Thank you for watching Dividend Data. I’d
greatly appreciate it if you leave a like and subscribe to the channel. If you follow
me on twitter, link in the description, you can real-time updates of my buys and dividends
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in the description. Please leave a comment below and thank you for watching!