J & J Snack Foods: The Soft Pretzel King Is Overvalued

Jan. 12, 2020 11:15 PM ETJ&J Snack Foods Corp. (JJSF)17 Comments
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Dividend Power
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Summary

  • J & J Snack Foods is a mid-cap consumer staples company that is the market leader in soft pretzels.
  • It has raised the dividend for 14 consecutive years. The dividend is well-covered by earnings and free cash flow.
  • The company grows organically and through bolt-on acquisitions.
  • The stock is presently overvalued.

Investment Thesis

As dividend growth stocks go, I like consumer staples companies with dominant market share or ones that are the major players in niche markets. One has to only look at the success of Hormel Foods Corporation (HRL), McCormick & Company (MKC), PepsiCo Inc. (PEP), and Coca-Cola Company (KO) to understand why. These companies dominate their respective market areas of branded meats, spices, salty snacks, and non-alcoholic beverages. In turn, this has translated into solid capital return to shareholders through dividends and share buybacks over many years.

In this article, I discuss J & J Snack Foods Corp. (NASDAQ:JJSF), a mid-cap consumer staples company. J & J Snack Foods is probably not well-known to most investors, but it has strong brands in soft pretzels, frozen ices and drinks, funnel cakes, and other snacks. The company is a Dividend Contender, having raised the regular dividend for 14 consecutive years. The total annual return for the company with dividend reinvested in the past 10 years has crushed that of the S&P 500 at ~18.4% versus ~13.2%. This is not easy for a consumer staples company and points to a strategy that is working and has excellent operational execution. The company has grown the top line for 48 straight years, which validates its strategy and execution. In turn, this has led to a high valuation of about 35X based on earnings. Although I like the company’s operational excellence, the high valuation, combined with margin pressures, are keeping me on the sidelines for now.

J & J Snack Foods Trailing Total Annual Returns

(Source: Dividend Channel)

Overview of J & J Snack Foods

J & J Snack Foods Corp. traces its history to 1971, when the current CEO bought the company out of bankruptcy. Since that time, it has grown from eight people to over 4,600 employees and roughly $1.2 billion in sales. The company manufactures, markets, and distributes snack foods and

This article was written by

Dividend Power profile picture
5.64K Followers
I am a self-taught individual investor and I have been investing in stocks for approximately 20 years. I focus on dividend growth investing with a long-term horizon since I believe in the compounding power of dividend growth investing. I generally look for undervalued large cap stocks with sustainable dividend growth and capital appreciation potential. My second focus is tech and small- or mid-cap stocks with or without dividends for their growth potential. I try to provide a little more in depth analysis weighing the positives and negatives. You can see my performance at my Tip Ranks profile. I am now in the Top 100 out of 13,540 (73rd and in the top 1.0%) financial bloggers (August 2022).You can follow me at my blog Dividend Power. Read my e-book --> 10 Forever Dividend Growth StocksI also now write stock analyses for Sure Dividend as a part-time free lance equity analyst. I provide investment analyses and research for their Sure Analysis Research Database. I also write stock snapshots for Portfolio Insight.

Disclosure: I am/we are long PEP, KO, HRL, JJSF, MKC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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