J.M. Smucker’s Earnings Are Exactly What Investors Needed

The J. M. Smucker Co. (NYSE: SJM) isn’t often associated with some of the high-profile dividend stocks in the food and beverage industry like PepsiCo (NYSE: PEP), General Mills (NYSE: GIS) and others. But that’s a mistake.j.m.-smucker-earnings

Smucker has a long and impressive history that dates back more than 115 years. It has strong brands, a few of which include its namesake jams, Jif, Pillsbury and Folgers.

In turn, Smucker has rewarded long-term shareholders with quarterly dividends, year after year, just like its more famous peers. Smucker has paid uninterrupted dividends since 1949 and has increased its dividend for 16 years in a row.

J.M. Smucker’s earnings for fiscal fourth-quarter 2015 were released Thursday. The results did not meet expectations, and management’s outlook disappointed, but investors shouldn’t be discouraged. Smucker remains a strong business with solid brands and more than enough cash flow to pay its dividends.

The company reported a $90 million net loss last quarter, compared to a $118 million profit in the same quarter last year. But most of this was due to the acquisition of Big Heart Pet Brands, which will ultimately help the company long-term.

Diversifying into pet food is a smart strategy for management to take. Traditional shelf-stable food and beverage products are not growing much in the United States. One area that continues to grow is pet health care, so it makes a lot of sense for the company to gain access into this category.

Excluding the acquisition charge and other non-recurring items, Smucker earned $0.98 per share, which barely missed analyst expectations by one penny.

In the upcoming fiscal year, management expects the company to earn at least $5.65 per share on $8 billion of revenue. Again, this forecast also missed expectations, which called for $5.85 in earnings per share.

A Few Headwinds

Smucker is seeing headwinds that are weighing on growth. First is the strong U.S. dollar, which is hurting sales and profit earned overseas. A second headwind is the rising cost of coffee. Profit in the company’s U.S. coffee business fell 14% last fiscal year.

This was Smucker’s worst-performing division by far, and that is a real concern since U.S. coffee is Smucker’s biggest business. It alone represents approximately 36% of the company’s total annual sales.

But Smucker isn’t standing still. It’s cutting costs in other areas of the business to help offset the rising cost of coffee. Plus, this year the company will release some new products in coffee to reignite sales, including K-Cup pods for its Dunkin’ Donuts packaged coffee.

The stock fell 3% after its earnings report and guidance, but investors should feel very good about the company. Shares had rallied nearly 20% just to start 2015, which is way ahead of the broader market’s 2% year-to-date return, so cooling off a bit is hardly cause for concern.

About Smucker’s Valuation

With this in mind, the one thing to quibble about with Smucker could be its valuation. The stock has rallied considerably in a relatively short amount of time, and it’s now valued at 21 times earnings. This exceeds the valuation for the S&P 500 index, which may be too aggressive considering food companies aren’t high-growth businesses.

But from a dividend perspective, there is nothing wrong with Smucker. Smucker yields 2.2%, which is above the average stock in the S&P 500.

Moreover, the company’s current $2.56 per-share annualized dividend represents just 45% of the company’s expected earnings in fiscal 2016. Its payout ratio is less than half of projected earnings, which means the dividend is secure, and there is even room for another dividend increase this year.

DISCLOSURE: I personally owns shares of PepsiCo (NYSE: PEP).

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Published by Wyatt Investment Research at