J.M. Smucker (SJM -0.16%) operates a great business. It makes staple foods that people eat day in and day out. Its powerhouse brands include household names such as Folgers Coffee, Jif Peanut Butter, and its namesake Smucker's jams and jellies. That kind of product lineup bodes well for the company's ability to deliver fairly consistent results, even in less than ideal economic times.
Still, consistency in execution only counts for so much. A company's market value is based on the market's expectations for its future earnings potential. The market has a short memory for temporary slip-ups, and over time a company's growth potential matters at least as much as its consistency does. And that's the key reason that the real-money Inflation-Protected Income Growth portfolio will soon sell its J.M. Smucker shares.
What's wrong with Smucker's future?
In and of itself, nothing is particularly wrong with J.M. Smucker or its future. Indeed, analysts expect earnings growth at roughly a 7.3% clip over the next few years. That's a reasonable growth rate for a mature food company, and one that J.M. Smucker is likely capable of achieving. The key concern is valuation: At that growth rate, its shares are priced at a sufficient premium to what the iPIG portfolio estimates is the company's fair value to justify the costs of selling.
After all, J.M. Smucker doesn't exist in a vacuum. Its key products have competitors, and those competitors are just as interested in building their businesses as J.M. Smucker is in building its own. In any competitive market, a company needs to consistently invest to stay relevant and to maintain and build its business. Take the competition that Jif faces in the peanut butter business.
Hormel Foods bought the Skippy peanut butter brand a little over a year ago. Companies that make acquisitions often like to invest in their new brands to show sufficient growth to justify the purchase price. Hormel Foods claims that Skippy is the leading brand in the faster-growing natural peanut butter segment. Winning in a faster-growing segment is a great way to build a business.
Likewise, ConAgra Foods owns the Peter Pan peanut butter brand and recognizes the importance of natural peanut butter. In 2011, ConAgra Foods launched its own "Peter Pan Simple Wonders" line to compete in that faster-growing naturals segment.
While J.M. Smucker has its own line of Jif Natural peanut butter, it faces two formidable foes that are willing to invest in innovation to capture market growth. That forces the company to innovate on the brand just to keep pace. If it doesn't, those competitors can take valuable retailer shelf space from Jif, and thus keep the brand from delivering the profits J.M. Smucker needs to achieve its expected growth.
What comes next?
As long as shares trade above $105, and once the Fool's disclosure policy allows, the iPIG portfolio will sell its shares of J.M. Smucker stock. Should the company's stock fall below $105, the portfolio will be happy to wait for a future opportunity to sell.
Note that J.M. Smucker has a history of increasing its dividend about once a year, and it is close to the anniversary of its last payout boost. If it increases its quarterly dividend to $0.65 per share or higher from its current $0.58 before the iPIG portfolio can complete its sale, then the portfolio will revisit and possibly reverse that sell decision.
Dividends can be a strong signaling device of what a company's leadership believes it can deliver. If J.M. Smucker's leadership is willing to increase its dividend substantially faster than the market's expectations of its growth, then it means either the company expects better things than the market or that it is increasing its payout ratio. A faster than expected dividend hike isn't a guarantee of great things to come, but it is a reason to take a closer look before selling a solid company's stock.
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