JM Smucker's (SJM) Review

04 Oct 2014 18:30
Tags sjm smuckers stock_review_2014

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When one thinks of JM Smucker’s (SJM) the first thing that comes to mind is peanut butter & jelly. And why not, JIF is the number one selling peanut butter brand and their jellies are also near the top.

But SJM is much more diverse than that. Some of their other major products include Pillsbury, Crisco, Hungry Jack, Folgers coffee, and Keurig coffee lines Dunkin Donuts and Millstone. Interestingly it is SJM’s coffee lines that have provided much of their earnings growth of the last few years.

Operating in the consumer goods segment it is easy to assume that SJM is a dividend growth company and your assumption would be correct. SJM has annually increased dividends for the last 12 years. So the next questions are; is the current dividend stable and are growth rates sustainable.

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Dividend Growth Rates (per share)
1-Yr 3-Yr 5-Yr 10-Yr
11.5% 12.4% 11.8% 9.5%

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Looking at some of my quick screening criteria for a DG stock we see some solid numbers:

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Dividend Growth Rate Debt/Equity Ratio
Criteria SJM Criteria SJM
>= 7.2% 11.5% < 1 0.46
Dividend Yield Payout Ratio
Criteria SJM Criteria SJM
> 3% 2.6% < 70% 47.6%

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The only weakness on the initial screen is that the current dividend rate of 2.6% is below the 3% criteria.

Looking at earnings over the last 5 years we have positive earnings growth since 2011.

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Earnings Per Share
2014 2013 2012 2011 2010
EPS $5.42 $5.00 $4.06 $4.05 $4.15
EPS YoY Growth 8.4% 23.15% 0.2% -2.4%

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Looking at different price to earnings ratios and again we see positive signs that the stock is adequately priced and even lower than the industry average.

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Price to Earnings Ratios
P/E (trailing 12 months) 18.37
P/E (forward 12 months) 15.39
P/E 5 year average 18.34
P/E industry average 20.06

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On the surface, SJM’s numbers per share indicate a strong dividend grower. Yet, per share data can be somewhat misleading when factoring in share buybacks or additional share distributions. SJM’s share buyback program has reduced outstanding shares from 118,951,434 in 2010 to 104,332,241 in 2014 (a reduction of 12.3%). With slightly more than 12% of outstanding shares removed from the market it is not hard to see how this clouds our ability to see the true financial health of the company. To look past share buybacks it pays dividends (pun intended) to analyze financial statements.

First up is earnings and revenue:

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2014 2013 2012 2011 2010
Earnings $565.2M $544.2M $459.7M $479.5M $494.1M
Earnings YoY Growth 3.85% 18.38% -4.12% -2.95%
Revenue $5,610.6M $5,897.7M $5,525.8M $4,825.7M $4,605.3M
Revenue YoY Growth -4.86% 6.73% 14.5% 4.78%

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Unlike the per share numbers the financial statements are showing growth trends that aren’t that attractive. In the prepackaged food industry it is not uncommon to experience temporary periods of declining revenue growth, you see similar declines in companies like Kellogs (K), ConAgra (CAG), or General Mills (GIS). But, what all these companies have in common is their ability to invest in new products, advertising and/or acquiring other businesses to increase revenue and earnings.

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Looking at SJM investments; they are introducing 125 new products in the upcoming 2015 fiscal year and made a significant acquisition of Enray, Inc and Silocaf of New Orleans, Inc. These acquisitions will increases their product offerings in grain & coffee segments. In SJM’s latest 10Q filing they entered into a definitive agreement to acquire Sahale Snacks, Inc., a leading manufacturer and marketer of premium, branded nut and fruit snacks, for approximately $80M. So we see evidence that SJM is investing in new products and acquisitions as their primary strategy to grow earnings and revenue over the long term. What I expect from SJM in the future (2016 and beyond) is a scale down of new products and focus on improving operating costs to further increase earnings and margins down the road.

Of course buying back shares, developing new product lines or acquiring other business units is never free and is typically funded via long term debt agreements. Looking at SJM’s long term debt levels they have increased from $2.07B in 2013 to $2.28B in 2014 (an increase of 10.5%). While this may seem alarming it does make sense to aggressively borrow now while rates are low. Additionally, even with the rise in long term debt their debt to equity still stands at a respectable .46 (any number below 1 is strong) and current ratio is 1.6 (anything above 1 is a good signal).

SJM’s future growth is not guaranteed and comes with risks. SJM’s product lines are dependent on agricultural supply. A dry year or drought, like what was experienced over the summer of 2014, can drive commodity prices drastically upwards and considering much of their product depends on fruit and coffee beans it is not hard to understand how a bad growing season will impact earnings.

Another area of risk is a strengthening dollar. In the latest 10Q filing, SJM ‘s earnings on international sales were $35.4M versus sales of $298.3M in comparison to last year’s performance of $43.1M earnings and revenue of $300.1M. What we see is that in 2013 14.36% of sales went to earnings while in 2014 it dropped to 11.86%. Most of the decline was due to exchange rates and a strong dollar. With the U.S. Federal government scaling back their bond purchasing program over the next year it could very well be a catalyst for the dollar being even stronger in 2015 further hurting their earnings growth.

One final area of the financial statements to look at where share buybacks cloud your view is the actual dividends paid or as I like to call it The Real Dividend Growth Rate.

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2014 2013 2012 2011 2010
Annual Dividends Paid $238M $222.8M $213.7M $194M $166.2M
Dividends YoY Growth 6.8% 4.25% 10.15% 16.72%

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Actual dividends paid growth rate is significantly lower than the per share growth rate. Buybacks appear to contribute from 21% to 43% of dividend per share growth. Without significant earnings/revenue growth the current dividend is reliant on a combination of share buybacks and increasing the percentage of earnings paid in dividends (currently 47.6%).

In summary, the company has a strong balance sheet, well managed debt and a deep pipeline of new products to help increase future revenues. Yet for all of its strengths, rising agricultural commodity prices and a strong dollar will continue to hurt overall earnings growth. With a 47.6% dividend payout and continued share buyback program there is still some room to grow the dividend per share in the near term and I see an annual growth rate low of 5% and high of 8% that can be achieved without significantly growing the payout ratio above 60% over the next three years. Additionally I see no signs that he dividend will be suspended, cut or completely canceled in that time either. Based on retaining the existing dividend payout and reduced potential growth I would be interested buying if the stock price drops to below $98 a share to align with my long term DGI goals.

Note: I do not own this stock at time of this writing.

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