Dividend Growth Investing in consumer staples stocks has been profitable for me in my retirement. Starting with my first consumer staples stock Procter & Gamble (PG) in 1980, I soon found out that these stocks demand a premium P/E ratio, usually around 20/1. Back on June 1, 2002, PG spun off some of their product lines to The J. M. Smucker Company (SJM). I then received shares of J. M. Smucker. I built up a full position by 2003 and then let it drip. I have been quite pleased with the long term dividend growth and note that this growth has accelerated in the last 5 years. According to Smucker's recent presentation to the Consumer Analyst Group of New York Conference they have increased their dividend at the rate of 11% per year and repurchased 10% of their shares outstanding over the past 2.5 years. They target an earnings per share growth goal of 8% and an 11% total shareholder return, including dividends.
Since this stock paid me a dividend on 3/01/2013 and has a total return on my investment (including dripped dividends) of 12.24% so far this year, I thought I would run a dividend growth study (of a $10,000 initial investment) to look for trends, and compare it to last August's study:
|Stock||Date of reinvest||Div Rate||# Shares||Dividend||Drip price||# Shares pur||Total Value||Current Yield|
Right off the bat, I looked at the Total Return column and saw that the holding had doubled in the 5 year period. My average cost for shares is $40.96 and my yield on average cost with the current dividend is 5.08%. It should be noted that the current yield as shown in the table is 2.3%. The difference between my yield on average cost and the current yield comes from price appreciation of the shares. Even though I went through the bottom of the Great Recession with this stock, hitting a low of $7,714.94 on my investment on 11/17/2008, it had already started back up before the market hit its low on March 2, 2009.
Smuckers never reached my 4% yield point, although it did touch 3.49% in May 2009. I have always considered SJM to be a mid-cap dividend growth stock. I usually don't make strategic investments in these, since they pay a low yield, even though the dividend growth rate has been around the company's target of 11% for the last 5 years (data from David Fish's CCC charts).
I have graphed the spreadsheet below:
When I calculate my SJM investment growth from 2003, the growth rate is about 11% per year. When I look at the growth from 2010 to the present, it appears to be 15.7% per year. I think the reason for this difference is consolidation in the industry. Large investors, like Warren Buffett, are buying up the competition, as SJM is doing with their recent purchases including Sara Lee's plant in Suffolk, Virginia. Current times of industry consolidation make the consumer staples sector a good investment now, even with the high P/E ratio (20.41) when compared with the S&P 500 (P/E 14.23). I have showed this comparison of price between the S&P500 vs SJM for the 5 year period from 2008-2013 in the chart below:
One should note from the above chart the 90% growth of SJM compared with the 10% growth of the S&P 500.
Conclusion: The J. M. Smucker company is becoming an international food company with three major categories representing 2/3 of sales; coffee, peanut butter, and fruit spreads. They have a major mobile campaign to gain Hispanic customers from that growing segment of the population. They are beginning to gain access to the Chinese market with their minority interest in Seamild which sells oats. I believe SJM is a sound long-term investment and a good dividend growth stock.
The next dividend increase should be in August 2013. Since the stock is now at $96.27 per share, one might find it difficult to purchase at the low yield. I learned back in 1980 if you want to get on the train and drip this sector, you have to buy the best company you can find and pay the premium to start a position.