The JM Smucker Company (SJM) has become a household name. Smucker is known for its fruit spread and jelly products around the world. Smucker has been an American fixture since 1897. The company sells jam, jelly, preserves, peanut butter, ice cream toppings, uncrustables, snack n waffles, coffee and specialty items. The company’s famous motto is recognizable worldwide. You have probably heard this saying as well “with a name like Smuckers, it has to be good”.
Smucker’s participates in the competitive packaged and processed goods industry. Smucker’s is one of the smallest players in an industry dominated by giants like Kraft Foods, Conagra Foods, and Nestle. Companies like Kraft are earnings giants that generate massive amounts of free cash flow. Smucker’s has sought to slowly grow its brand with its most recent acquisition being Folger’s coffee in 2008.
The Margins Are Good
The company has done a good job of doing more with less. Although Smucker has much smaller revenue and earnings numbers than its competitors, the company boasts the highest margins in the industry. Smucker’s operating margins were just shy of 19%, more than double the industry average. Gross margins were outstanding at nearly 40%. The company had $4.6 billion dollars in annual sales and $1 billion dollars in earnings. The company produced a gross profit of almost $1.8 billion dollars.
The company has a solid balance sheet with $535 million dollars in cash and $1.3 billion dollars in debt. Smucker’s has generated $545 million dollars in free cash flow over the past 12 months. Book value is pegged at $46.35 per share. Shares currently trade at 12.4 times next year’s earnings and 1.6 times sales. Smucker only trades at 1.3 times book value.
With a price to earnings ratio of 13.65, shares are trading right in line with the historical earnings growth rates. Earnings growth is expected to slow however with analysts forecasting growth at just 6.5% over the next five years. If the forecast is correct then the stock is not exactly cheap trading at two times PEG. Management must believe that the stock is cheap having instituted an aggressive buy back plan. Smucker’s has agreed to buy back 5 million shares of the company’s stock.
The stock has started to show up on the radar of income investors recently. Over the past year Smucker has developed into a dividend play. The company has been steadily increasing its dividend. Smucker just increased its dividend payout 10% last week. The company is now paying shareholders an annual dividend of $1.76 per share which is an effective yield of 2.85%. This is slightly higher than the 5 year average historical payout of 2.50%. The dividend is easily sustainable with the current payout representing just 35% of earning per share.
In my opinion, shares of Smucker are not a screaming buy but the stock is cheap compared to competitors. The company steadily produces earnings quarter after quarter and is slowly becoming an attractive dividend stock. Smucker’s is an attractive takeover target to larger companies in the industry.