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Summary

  • J.M. Smucker's Earnings Release has caused the stock to decline today.
  • The company still has solid growth plans in place for long-term shareholders.
  • Find out which Smucker coffee brand grew volume 24% year over year.

J.M. Smucker (NYSE:SJM) released its first quarter 2015 results today. The company saw revenue decrease 2% due to the company's closing of its private label hot beverage business in international markets. Adjusted operating income increased 3%, adjusted net income increased 6%, and adjusted income per common share increased 11% versus the same quarter a year ago.

Source: SJM 1st Quarter 2015 Earnings Release

J.M. Smucker is a business built around its household name brands that command dominant market shares. The picture below shows the strength of J.M. Smucker's US retail brands.

(click to enlarge)
Source: SJM June 2014 Investor Presentation

The company divides its operations into 3 segments: US retail coffee; US consumer foods; and international, foodservice, and natural foods. The US retail coffee segment was contributed 38% of first quarter sales, the US consumer foods segment contributed 39%, and the remaining 23% of sales was from the company's international, foodservice, and natural foods segment.

US Retail Coffee

2nd Quarter Results

Volume increased 2 percent for Smucker's US retail coffee in the company's fiscal first quarter 2015. The company's flagship Folger's coffee brand grew volume 2%. J.M. Smucker's Dunkin Donuts packaged volume was up 3%. The company saw huge volume growth of 24% year over year for its Café Bustelo line of coffee products. Café Bustelo's was acquired by J.M. Smucker in 2011. Since that time, the brand has seen strong growth on the strength of J.M. Smucker's distribution network.

Despite volume increases, the company saw net revenue decline 2% in the quarter. Revenue fell due to price cuts in Smucker's coffee products. The company raised its coffee prices 9% in the quarter, and expects to see the effects of the price increase come into play in the 2nd quarter of the company's fiscal 2015.

Growth Prospects

In the short term, J.M. Smucker will see revenue grow from its recent coffee product price increases. The gains from this will be partially offset by expected price increases in the cost of green coffee. In the medium term, Smucker's coffee division will see strong growth from its surging Café Bustelo brand and rising Keurig (NASDAQ:GMCR) K-Cup sales. The company's K-Cup volume was up 8% versus the same quarter last year.

US Consumer Foods

2nd Quarter Results

Volume was flat for the US consumer foods division in the first quarter of Smucker's fiscal 2015. Revenue dropped 3% due to lower pricing of the company's Crisco brand and very poor performance for its Pillsbury brand. J.M. Smucker owns the Pillsbury's baking products, while General Mills (NYSE:GIS) owns the rest of the brands products. Smucker's Pillsbury baking products saw volume decrease 10% and net sales drop 11%.

On the bright side, Jif brand volume was up 4%, and sales were up 3%. Crisco volume increased 14% but revenue was down 1% due to pricing cuts in the brand. The biggest winner for J.M. Smucker in its US consumer food segment was Smucker's Uncrustables Frozen Sandwiches. Volume increased 12%, while sales were up 11% versus the same quarter a year ago.

Growth Prospects

Smucker's best opportunity for growth in its US consumer foods division in the short term is to raise prices on its Crisco products. The company also needs to find a way to better reach consumers in its declining Pillsbury baking products division.

J.M. Smucker recently announced plans to acquired Sahale Snacks from private equity firm Palladium Equity Partners. Sahale Snacks has annual sales of close to $50 million a year. The acquisition will boost Smucker's US consumer foods division sales about 9.5%. Sahale Snacks sells premium nut and fruit products to consumers through club, convenience, and grocery stores.

Over the long-term, Smucker's will grow its US consumer foods division primarily through acquisitions and product innovation. Smucker's Uncrustables is an excellent example of product innovation within the company's established brands. The company is constantly innovating, and plans to release over 100 new products through 2014.

International, Foodservice, and Natural Foods

Net sales decreased 1% for the company's international food segment in the first quarter of 2015 compared to the first quarter of 2015. The company saw a steep dip in operating profit which was down 18% versus the year ago period. Operating profit declined due to the company's exiting of its international food service business. The Cumberland operating agreement the company signed in late 2013 as well as the acquisition of Enray's in 2013 offset revenue loss from the international food service division but have not translated into operating profits.

Comparison To Other Dividend Growth Stocks

J.M. Smucker will be compared to other dividend growth stocks below using the 5 Buy Rules from the 8 Rules of Dividend Investing. Each rule has historically increased return based on the studies listed below. Comparing J.M. Smucker to other dividend growth businesses shows how the business compares to other investment opportunities investors have.

Consecutive Years of Dividend Increases

J.M. Smucker has increased its dividend payments for 16 consecutive years, and has paid uninterrupted dividends since 1949. The company's long streak of dividend growth and stability shows it can operate under a variety of economic conditions.

Why it matters: The Dividend Aristocrats (stocks with 25-plus years of rising dividends) have outperformed the S&P 500 over the last 10 years by 2.88 percentage points per year.
Source: S&P 500 Dividend Aristocrats Factsheet

Dividend Yield

Smucker's has a current dividend yield of about 2.5%, which is the 66th highest out of 132 businesses with 25+ years of dividend payments without a reduction. The company's dividend yield is above the S&P 500's yield, but fairly average for a dividend growth stock.

Why it Matters: Stocks with higher dividend yields have historically outperformed stocks with lower dividend yields. The highest-yielding quintile of stocks outperformed the lowest-yielding quintile by 1.76 percentage points per year from 1928 to 2013.
Source: Dividends: A Review of Historical Returns

Payout Ratio

J.M. Smucker has a payout ratio of 42%. The company has the 63rd lowest payout ratio out of 132 business with 25+ years of dividend payments without a reduction. The company has ample room to raise its dividend payments faster than overall business growth for several years.

Why it Matters: High-yield, low-payout ratio stocks outperformed high-yield, high-payout ratio stocks by 8.2 percentage points per year from 1990 to 2006.
Source: High Yield, Low Payout by Barefoot, Patel, & Yao, page 3

Long-Term Growth Rate

The company has managed to grow its revenue per share over 6% a year through the last decade. The company's revenue per share growth is the 40th highest out of 132 businesses with 25+ years of dividend payments without a reduction.

Why it Matters: Growing dividend stocks have outperformed stocks with unchanging dividends by 2.4 percentage points per year from 1972 to 2013.
Source: Rising Dividends Fund, Oppenheimer, page 4

Long-Term Volatility

J.M. Smucker has a long-term standard deviation of 21.3%, which is the 22nd lowest out of 132 businesses with 25+ years of dividend payments without a reduction. The company's low standard deviation is due to selling low cost consumer food products which are somewhat resistant to recessionary periods.

Why it Matters: The S&P Low Volatility index outperformed the S&P 500 by 2 percentage points per year for the 20-year period ending September 30th, 2011.
Source: Low & Slow Could Win the Race

Conclusion

J.M. Smucker is a high quality business that sells several market leading branded food products. The company is well run and has a long history of rewarding shareholders. The company ranks in the Top 15 based on the 5 Buy Rules from The 8 Rules of Dividend Investing. The company makes a solid addition to the consumer food products portion of an investor seeking income and growth.

Source: J.M. Smucker Has Room To Grow After Today's Earnings Release