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.