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The third selection for the newly launched Inflation-Protected Income Growth Portfolio is food kingpin J.M. Smucker (NYSE: SJM ) . As anyone who has ever had or been a kid knows, peanut-butter-and-jelly sandwiches are a staple food of childhood. Smucker not only makes its namesake jelly, but it completes that perfect pairing with Jif peanut butter. To top it all off, Smucker happily sells Folgers coffee for the busy moms who have to wake up at the crack of dawn to make those PB&Js.
Smucker has a history of paying dividends that stretches back to 1960 and of paying increasing amounts each year for at least the last 15. The company's shareholder-friendly behavior predates the Bush dividend tax cuts and thus will likely not be derailed if they expire. And with a respectably low payout ratio of 45%, it has decent coverage even if things do go bad.
Why it's worth owning in the iPIG Portfolio
To earn a spot in the portfolio, a company has to pass a series of tests related to its dividends, its balance sheet and valuation, and how it fits from a portfolio diversification perspective.
- Payment: The company's annual dividend currently sits at $2.08 a share, a yield of 2.4% based on Friday's closing price.
- Growth history: The company has paid higher dividends every year since at least 1997. Note that it did post nine quarters of stagnant dividends between 2000 and 2002, but the way those quarters fell meant that every calendar year saw a higher payment than the prior year.
- Reason to believe the growth can continue: With a payout ratio of 45%, the company retains 55% of its income to reinvest for future growth. That low payout ratio also means the dividend can continue to move up for several years, even if the business stagnates.
Balance sheet and valuation:
- Balance sheet: A debt-to-equity ratio of 0.4 indicates that the company does use debt, but hasn't over-leveraged itself to the point where a financial hiccup would derail it.
- Valuation: By a discounted cash flow analysis, the company looks to be worth around $11 billion, making its recent market price of $9.5 billion look reasonable to slightly discounted. Of course, there's risk involved in every forward-looking estimate, and it's possible that the company won't meet the growth rate needed to justify that valuation.
- The first pick scheduled for the portfolio is an industrial conglomerate, and the second makes medications, which positions this food business reasonably from a diversification perspective.
What are the risks?
Over the past several years, Smucker has grown through acquisitions, which requires the company to integrate the purchases successfully in order to be worth the price it paid. Also, the acquisitions thrust the company into the limelight against some pretty formidable competition. When up against big competitors with deep pockets, Smucker may find itself having to pony up cash to defend its market position in ways it didn't have to when it pretty well owned the fruit spreads business.
Now that Smucker owns Folgers, for instance, Kraft's (NASDAQ: KRFT.DL ) Maxwell House is a strong competitor it must watch out for. Similarly, owning Jif means Smucker is up against ConAgra's (NYSE: CAG ) Peter Pan and Unilever's (NYSE: UL ) (NYSE: UN ) Skippy peanut butters. Those are some incredible heavyweights with the capacity to shift considerable resources from other parts of their businesses to fight a long battle for market share.
What comes next?
When the Fool's disclosure policy allows, I plan to buy J.M. Smucker stock for the Inflation-Protected Income Growth Portfolio, as long as its share price remains below $90. I expect to invest around $1,500 in the selection, giving it a 5% allocation in the portfolio, with 85% of the portfolio still remaining cash. Watch my article feed for details of the next pick, coming soon.
More expert advice from The Motley Fool
Kraft Foods Group is entering a new era after its recent corporate break-up. Its brand power is indisputable and its market share dominates, but Kraft's growth potential is limited and its heavily commoditized categories face massive pressures. In The Motley Fool's brand-new premium report on the company, we guide you through everything you need to know about Kraft, including the key opportunities and threats facing the company. To get started, simply click here now.