Consumer and pet foods conglomerate The J.M. Smucker Company (SJM -2.05%) has been a poor investment over the past five years; shares are no higher than in 2015, while the S&P 500 has doubled since then. Despite its poor track record in recent years, here are three reasons why the stock's next five years could be much better.

1. The balance sheet is getting healthy again

J.M. Smucker's troubles started in 2015 when the company made a strategic decision to jump into the pet food industry with both feet. It acquired Big Heart Pet Brands for $5.8 billion in cash and stock, giving J.M. Smucker ownership of pet food brands like Milk-Bone, Meow Mix, Kibbles n Bits, and more. A few years later, the company acquired Ainsworth Pet Nutrition for $1.7 billion in cash.

These acquisitions turned J.M. Smucker into a huge player in the pet food space. Today, it remains important to the business; approximately one-third of its total revenue is from pet food products.

A smiling adult and child enjoying peanut butter and jelly sandwiches.

Image source: Getty Images.

However, the company's balance sheet ballooned in debt. J.M. Smucker had $1.9 billion in long-term debt at the beginning of 2015, the year it acquired Big Heart Pet Brands. After the Ainsworth deal, long-term debt was $6.1 billion, more than triple.

When a company takes on too much debt, it can strain the business; management must pay down interest expenses away from its free cash flow. J.M. Smucker was financially bogged down, leveraged to nearly 4.5 debt/EBITDA, a ratio that indicates a company's debt compared to its earnings before interest, taxes, depreciation, and amortization; it's the profits of a business before accounting adjustments.

J.M. Smucker has steadily been paying down its debt, which now stands at a debt/EBITDA ratio of 2.9. There is still more work to do, but the company will gain its financial flexibility back as the balance sheet sheds debt.

2. J.M. Smucker is a strong cash flow generator

The company has continued paying down debt because it produces a lot of free cash flow. J.M. Smucker has done $7.9 billion in revenue over the past 12 months and turned $1 billion of it into free cash flow, converting 12.6%.

J.M. Smucker is a strong dividend stock; it pays a dividend each quarter that totals $3.96 per year, a dividend yield of 3.27%. It only spends 35% of its free cash flow on the dividend, so it has had enough cash to pay down its debt load slowly.

With more financial breathing room for the company, shareholders are starting to enjoy some benefits. J.M. Smucker's dividend was recently increased 10%, an uptick after the company's averaged a 4.9% raise over the past three years. With financials continuing to head in the right direction, investors could see more dividend increases and stock buybacks in the years to come.

3. The stock is a bargain

Investors have soured on J.M. Smucker over the years due to its balance sheet problems. The stock still trades at a similar stock price to 2015, but has the business performed the same? The company generated adjusted earnings per share of $5.61 in 2015 and $9.12 in its fiscal 2021 year.

In other words, the stock price remained roughly the same while the underlying business grew its profits 62% over the same time period. The stock's price-to-earnings (P/E) ratio has fallen as a result, from 21.5 in 2015 to 13.2 now. The S&P 500 trades at a forward P/E ratio of 22, so the stock has become very discounted to the broader market.

A boring stock with a bright future

With growth, J.M. Smucker isn't going to blow you away; it's a consumer products company and management's long-term goal is to grow at a high single-digit rate. But investors have pushed the stock to an attractive valuation, and the balance sheet has improved while the business grew profits.

Investors can get a stable, dividend-paying stock on sale, which makes it appear that the stock price won't continue to stay flat forever. The next five years seem poised to be a step in a new direction.