A couple months back, Fool colleague Rich Smith penned a piece on peanut butter-and-jelly whiz Smucker
Results for the quarter were OK. Although reported sales were up 60%, most of that gain was due to the acquisition of the International Multifoods business. Stripping that out, sales were up about 5%. Income from continuing operations was up about 14%, though the company did not specify what that number would have looked like without the acquisition (quick guess? lower would be a good bet).
Margins were weaker for the period, mostly because of the lower gross margins of the International Multifoods businesses. Although management did not say whether it believed it could improve International Multifoods' gross margins to what those of the Smucker businesses used to be, it did acknowledge its ongoing focus on existing non-strategic brands and improving overall operations.
Given their economies of scale and generally predictable demand patterns, food companies generally produce large amounts of free cash flow, which management can choose to return to shareholders as dividends or share buybacks. Smucker, though, does not appear to be planning to do so.
When asked about the company's plans for future cash flow, management demurred at pledging dividend increases or share purchases. Rather, it said that additional acquisitions will be a "top use of our cash."
Now, maybe I'm getting hung up on semantics, but that irked me. It's not "our cash," Smucker management, but rather your shareholders' cash. And being that that cash belongs to the shareholders, it should be used in their best interests.
Given the company's low (and declining) return on equity, additional acquisitions may give the illusion of prosperity but won't necessarily add shareholder value. What's more, more than half of the company's assets are already intangible, share dilution was 15% on an annual basis in December, and the company has a lot more debt than cash.
It's pretty tough for me to get excited about these shares. While the dividend yield isn't too bad, I just can't overlook the fact that there are other food companies out there that seem like better investments. Kraft
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Fool contributor Stephen Simpson, a chartered financial analyst, has no ownership interest in any stocks mentioned.
