Regardless of the economic sector, brand recognition is critical to the success of a business. That's because widely known brands tend to enjoy competitive advantages over peers, such as the ability to convince customers to pay more versus other products.
The consumer staple known as J.M. Smucker (SJM -0.20%) fits this profile. Here are three reasons why income investors should think about adding the stock to their portfolios.
1. Regularly used and widely trusted brands
J.M. Smucker generated approximately 95% of its net sales in the previous fiscal year ended April 30, 2022 inside the U.S. Its brands are commonly found in homes throughout the country. In fact, nearly 90% of households in the U.S. have at least one of its products in their pantries. The Ohio-based company's stacked brand portfolio includes 9Lives cat food, Kibbles 'n Bits dog food, Folgers coffee, Jif peanut butter, and Smucker's jam and jellies, to name just a few.
| Total Q3 Revenue | Growth Rate |
|---|---|
| $2.2 billion | 7.7% |
J.M. Smucker's customers rely on its products in everyday life, which explains the solid top-line growth in its third quarter ended Jan. 31. Price hikes to the tune of 15% on its products to keep up with rising costs contributed heavily to the company's high-single-digit net sales growth during the quarter. Because of the inelastic nature of J.M. Smucker's products, its volume fell just 4% for the quarter. Along with the divestiture of its natural beverage and grains and private label dry pet food businesses and unfavorable foreign currency translation, this is how the company posted healthy net sales growth in the quarter.
| Selling, distribution, and administrative costs growth rate | Outstanding share count growth rate |
|---|---|
| 13.4% | (1.4%) |
J.M. Smucker's non-GAAP (adjusted) diluted earnings per share (EPS) dipped 5.2% year over year to $2.21 during the third quarter. Because selling, distribution, and administrative costs shown above grew at a faster clip than its net sales, the company's non-GAAP net margin contracted by 160 basis points over the year-ago period to 10.7%. This reduced profitability wasn't able to be offset by the company's lower share count due to its share repurchase program. That explains how J.M. Smucker's adjusted diluted EPS fell despite the expansion in its top line.
As pressures on the company's bottom line gradually fade in the quarters ahead, J.M. Smucker's profitability is poised to rebound. This is why analysts are forecasting mid-single-digit adjusted diluted EPS growth from the company through the next five years.
Image source: Getty Images.
2. The market-beating payout can keep growing
J.M. Smucker's 2.7% dividend yield is quite appealing when compared to the S&P 500 index's 1.7% yield. The company's dividend also appears to be sustainable over the long run.
That's because J.M. Smucker's dividend payout ratio is positioned to come in around 47% for the current fiscal year set to end in April. Such a low payout ratio lets the consumer staple retain the funds needed to invest in future growth opportunities, repurchase shares, and repay debt. As a result, I believe the company's dividend should continue growing at a mid- to upper-single-digit clip annually over the medium term.
3. A quality business at a reasonable valuation
As the broader financial markets have languished in the past 12 months, shares of J.M. Smucker have soared 20% during that time. Yet, the stock still seems to be rationally valued for dividend investors.
J.M. Smucker's forward price-to-earnings (P/E) ratio of 16 is slightly less than the packaged foods industry average forward P/E ratio of 16.4. This provides a sensible entry point for income-focused investors to buy the stock at the current $155 share price.
