Based on the fact that everybody needs to eat, consumer staples can be a very reliable economic sector for investors seeking ever-rising dividend income. This is especially true when companies feature well-known and regularly used brands in their product portfolios.
J.M. Smucker (SJM -1.37%) is one such consumer staples company whose products are loved by consumers. But should income investors buy the stock and its 2.7% dividend yield? Let's delve into J.M. Smucker's fundamentals and valuation to find out.
Brand power is driving strong growth
J.M. Smucker is a predominantly U.S.-oriented business with all but 5% of its net sales sourced domestically last year. The company's U.S. presence is so significant that its products -- including Smucker's jam and jellies, Pup-Peroni dog treats, Jif peanut butter, and Dunkin' at-home coffee -- are found in around 90% of households.
The company's net sales increased 9.9% year over year to $2.2 billion during the fiscal fourth quarter ended April 30. This top-line growth was fueled by an 11% increase from price hikes. And because millions of consumers have incorporated the company's products into their daily routines, these higher prices were tolerated: Volume was unchanged from the prior year. Adjusting for foreign currency translation headwinds due to the strength of the U.S. dollar and several business divestitures, the company's sales would have grown 11% for the quarter.
| Metric | Q4 2022 | Q4 2023 |
|---|---|---|
| Organic constant currency net sales growth rate (YOY) | 9% | 11% |
| Net margin | 11.7% | 12.5% |
Data source: J.M. Smucker. YOY = year over year.
Its non-GAAP (adjusted) diluted earnings per share (EPS) soared 18.4% higher over the year-ago period to $2.64 in the fiscal fourth quarter. Thanks to disciplined cost management, its cost of products sold and selling, distribution, and administrative expenses categories grew at a lesser rate than net sales -- and its non-GAAP net margin expanded by 70 basis points during the quarter.
Combined with a lower share count, that is why adjusted diluted EPS growth outpaced net sales growth for the quarter. Looking forward, analysts believe J.M. Smucker's brands and share repurchases will produce 5.3% annual earnings growth through the next five years.
Image source: Getty Images.
A sustainable and rising dividend
J.M. Smucker's dividend is quite appetizing when stacked against the 1.6% yield of the S&P 500 index. And it hasn't been a slouch on dividend growth in the past 10 years, either: The quarterly dividend per share has rocketed upward by 96.2% during that time -- a roughly 7% annual growth rate.
Similar growth also appears poised to continue in the years to come, offering dividend growth investors a nice mix of starting income and growth potential. The company's dividend payout ratio came in at just 45.4% in its fiscal year ended April 30, 2023. Such a low dividend obligation leaves J.M. Smucker with the funds needed to further grow its business and enhance its balance sheet.
The stock is a decent value
As more investors have aimed to shore up their portfolios with proven businesses over the last 12 months, shares of J.M. Smucker have fared quite well. The stock has gained 23% over the period. Surprisingly, it doesn't seem to be unreasonably valued at the current $153 share price -- its forward price-to-earnings (P/E) ratio of 15.2 remains less than the packaged foods industry average of 16.4. Considering J.M. Smucker's admirable brand portfolio, this discounted valuation makes the stock a buy for dividend growth investors.
