Building up enough passive income to fund what you want to do offers a viable path toward that elusive goal of financial freedom. Buying stock in companies with iconic brands that pay solid, and growing, dividends is my favorite way to build up that needed passive income.
The consumer staple manufacturer J.M. Smucker (SJM 1.97%) is arguably one such company. Let's dig deeper into this iconic company's fundamentals and valuation to learn why it is a great fit for dividend growth investors.
A robust brand portfolio drives respectable sales growth
If you're reading this from the United States, there's a good chance that you have at least one product from J.M. Smucker in your household. In fact, J.M. Smucker estimates that its brands are found in almost 90% of homes across the country.
This is because the company's portfolio is stuffed full of well-known brands that consumers use every day. These include Smucker's jellies and jams, Jif peanut butter, Folgers coffee, and Meow Mix cat food.
J.M. Smucker's net sales increased 7.6% year over year to $2.2 billion during the second quarter ended Oct. 31. What was behind the large-cap company's healthy top-line growth rate?
J.M. Smucker's high-single-digit net sales growth is impressive enough on its own. But excluding divestitures and the unfavorable foreign currency translation from a strengthened U.S. dollar compared to the Canadian dollar, net sales were actually 11.1% higher over the year-ago period.
The company gained 17% in net sales from price hikes in the quarter. And because its products are so embedded into the daily routines of consumers, volume declined just 6% year over year for the quarter. This demonstrates the elastic nature of J.M. Smucker's products. For the most part, people aren't going to switch brands for these products or cut the peanut butter and jelly sandwich out of their routine.
J.M. Smucker's non-GAAP (adjusted) diluted earnings per share (EPS) fell 1.2% over the year-ago period to $2.40 during the second quarter. Due to the inflationary environment, growth in the cost of products sold expense category (12.4%) ate into profitability in the quarter. This explains how J.M. Smucker's non-GAAP net margin dipped by 125 basis points to 11.6% for the quarter. A 1.4% reduction in the company's diluted share count wasn't able to completely offset lower profitability, which is why adjusted diluted EPS growth lagged behind net sales growth.
With inflation falling steadily, J.M. Smucker's profitability should recover. That's why analysts are expecting 5% annual adjusted diluted EPS growth from the company over the next five years.
A market-topping dividend with solid growth potential
Stacked against the S&P 500 index's 1.6% dividend yield, J.M. Smucker's 2.6% yield can satisfy the appetite of income investors. And if that weren't enough for yield-focused investors, the dividend is safe and should have no trouble growing in the future.
This is evidenced by the fact that J.M. Smucker's dividend payout ratio for its current fiscal year will clock in around 47%. A manageable dividend obligation such as this one leaves the company with the capital necessary to achieve a balance of reinvesting profits for future growth, reducing debt, and executing share repurchases. This is why I believe that J.M. Smucker's dividend growth will somewhat exceed earnings growth over the next few years.
The stock is slightly discounted
J.M. Smucker is a quality business. And despite shares being up 13.4% year to date (compared to the S&P 500's 16% drop), the stock still looks like a buy for investors looking to outperform the market and gradually build wealth.
Its forward price-to-earnings (P/E) ratio of 16 is below the packaged foods industry forward P/E ratio of 17.7. That's an attractive valuation for a blue-chip stock with legendary brand power.