J.M. Smucker (NYSE:SJM) and General Mills (NYSE:GIS) both sell branded grocery store products. The companies both own the Pillsbury brand, with J.M. Smucker selling Pillsbury flour and cake mixes while General Mills sells Pillsbury crescent rolls, cinnamon rolls, and biscuits (among others). General Mills is significantly larger than J.M. Smucker with a market cap of $33 billion versus $10 billion for J.M. Smucker.
This article examines J.M. Smucker and General Mills using the 5 Buy Rules from the 8 Rules of Dividend Investing. The 8 Rules of Dividend Investing identify high quality businesses trading at fair prices or better prices. Each rule has supporting evidence showing that it has historically improved returns.
Rule 1: Consecutive Years of Dividend Increases
General Mills has not reduced its dividend in an unbelievable 114 years. The company has one of the longest active dividend streaks of any publicly traded business. J.M. Smucker has paid increasing dividends for 16 consecutive years, and has paid uninterrupted dividends since 1949. Both businesses have long histories of rewarding shareholders with rising dividends.
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
Rule 2: Dividend Yield
- General Mills has a dividend yield of 3%
- J.M. Smucker has a dividend yield of 2.5%
General Mills is ranked higher than J.M. Smucker in this category due to its higher dividend yield.
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
Rule 3: Payout Ratio
- General Mills has a payout ratio of 53%
- J.M. Smucker has a payout ratio of 42%
J.M. Smucker is ranked higher than General Mills in the payout ratio category as it has more room to increase its dividend faster than overall company growth.
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
Rule 4: Long-Term Growth Rate
- General Mills has a long-term revenue per share growth rate of 6.8%
- J.M. Smucker has a long-term revenue per share growth rate of 6.3%
General Mills has managed to grow revenue per share slightly faster than J.M. Smucker has over the last decade. General Mills slightly outranks J.M. Smucker in this category.
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
Rule 5: Long-Term Volatility
- General Mills has a long-term standard deviation of 17%
- J.M. Smucker has a long-term standard deviation of 21%
Both businesses have had low volatility over the last decade. General Mills in particular has had minimal stock price volatility. The company has the 3rd lowest volatility out of 132 businesses with 25+ years of dividend payments without a reduction.
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
General Mills Current Events & Growth Prospects
General Mills' operations are divided into 3 segments: US Retail, Convenience Store, & International. US Retail is the largest and most important for the company. It accounts for about 60% of the company's overall revenue.
The company posted disappointing results in its most recent quarter. Sales for the company's fiscal 4th quarter of 2014 were down 3% compared to sales for the 4th quarter of 2013. Sales were down due to lower volume (-2%) and foreign currency exchange rates (-2%) but were offset by higher prices (1%). Adjusting for foreign exchange rates, sales decreased 1% on a quarter over quarter basis. For the full year, sales increased 1% and adjusted diluted earnings per share increased 4%. The company's recent weakness will not likely persist. General Mills expects earnings per share to grow in the high single digits for its fiscal 2015.
General Mills expects US Retail segment revenue growth in the mid single digits in its current fiscal year. The company plans to achieve growth in the US by investing in cereal, returning yogurt to growth, accelerating better-for-you snacking, and building on strong momentum in its Hispanic and baking brands.
Click to enlarge
Source: General Mills Investor Relations
General Mills' cereal brands have experienced stagnation over the last several years. The company plans to increase cereal revenue by renovating older cereal brands (Cinnamon Toast Crunch, Trix) and innovating within the cereal industry.
Two cereal innovations that are driving sales are protein cereals, and gluten free cereals. General Mills has had success with past cereal brand renovations. In 2010, Chex was rebranded as 'gluten free'. Since that time, sale of Chex in the US have grown at 10% annually. The company's renewed focus on cereal should help the company gain market share and increase cereal revenue.
Click to enlarge
Source: General Mills 4th Quarter Presentation, slide 26
General Mills' Yoplait yogurt finished fiscal 2014 on a strong note. May 2014 sales were up 10% versus May 2013 sales. The company's share of the Greek yogurt market has stabilized at around 10% on strength from Yoplait Greek. General Mills recent taste test advertising campaign has caused quite a stir (no pun intended) in the advertising world. The company's claim that "nearly 2 in 3" consumers prefer General Mills' Yoplait Greek yogurt to Chobani yogurt was upheld by the better business bureau's national advertising division. Look for General Mills to continue gaining ground on Chobani as the company hones in on its marketing message.
Better-for-You Snacking, Hispanic Brand, & Baking Brands
Consumers are demanding healthier options. General Mills' better-for-you snacking options are meeting customer demand. The company's healthy brands include Fiber One, Nature Valley, LARA Bar, and Food Should Taste Good. General Mills is aiming to continue growth in better-for-you snacking with new product innovations such as LARA Bar Granola (gluten free, non GMO), and LARA Bar ALT protein bars.
The company's Pillsbury brand has continued to do well. The Immaculate healthy baking alternative brand provides an alternative to Pillsbury for the health conscious consumer. Finally, Hispanic brands are posting positive growth due to favorable population demographic trends in the US. This trend will likely continue, as Hispanic population is expected to rise quickly in the US over the next several years.
Source: Get More Engagement
J.M. Smucker Current Events & Growth Prospects
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
J.M. Smucker recently released its first quarter 2015 results. 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 earnings per common share increased 11% versus the same quarter a year ago. The company's large earnings per share increase despite the dissolution of its private label hot beverage business shows the company is focused on the bottom line, not taking on unprofitable business to increase the overall size of the business.
J.M. Smucker expects organic revenue growth of just under 5% in its fiscal 2015. The company believes it can grow earnings per share by 8% over the long-term from organic growth (3% to 4%), acquisitions (2% to 3%), and share repurchases (~3%).
J.M. Smucker is very specific about what types of businesses it is looking to acquire. The company is looking for 3 types of businesses to acquire. The first of which are transformational acquisitions. These are very large acquisitions that substantially alter the company. The Folger's & Jif acquisitions are examples of transformational acquisitions that significantly bolstered J.M. Smucker's top and bottom lines.
Secondly, the company is looking for bolt-on acquisitions; smaller brand acquisitions that leverage the company's core competencies. Finally, J.M. Smucker is looking for enabling acquisitions; smaller brands that help the company enter new markets.
An example of both bolt-on and enabling acquisitions is J.M. Smucker's recently announced plan 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. The acquisition will give J.M. Smucker a foothold in the premium nuts and fruit category.
Like General Mills, J.M. Smucker is focusing on building brands that appeal to the growing Hispanic population. The company's most successful product to this end has been Café Bustelo. The brand saw volume surge over 20% quarter over quarter.
J.M. Smucker is constantly developing new products to drive organic revenue growth. In 2014, the company launched over 100 new products. New product sales are likely to continue to drive growth going forward.
Click to enlarge
Source: SJM June 2014 Investor Presentation
One of J.M. Smucker's most successful in house product innovations is its Smucker's Uncrustables ready to eat peanut butter and jelly sandwiches. The company saw volume increase 12%, while sales were up 11% versus the same quarter a year ago for Smucker's Uncrustables. The ready to eat sandwiches have seen steady volume and sales growth over their product life.
Shareholder Return Comparison
Shareholders of J.M. Smucker can expect a CAGR of between 9.5% and 12.5% going forward from dividends (2%), share repurchases (3.5%), and organic growth (4% to 7%).
Shareholders of General Mills can expect a CAGR of between 7% and 12% going forward from dividends (3%), share repurchases (2% to 3%), organic revenue growth (2% to 3%), and operating margin improvements (0% to 3%).
General Mills & J.M. Smucker are both high quality dividend growth stocks that have a long history of rewarding shareholders. Both are in the Top 15 best stocks using the 8 Rules of Dividend Investing. General Mills outranks J.M. Smucker due to its higher yield, higher growth rate, and extremely low standard deviation. With that said, both stocks make excellent long-term investments for investors seeking growth and income.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.