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J.M. Smucker: Steady Payout, But Overpriced

And SJM has been stretching the percentage of earnings it pays


J.M. Smucker (NYSE:SJM) is the food manufacturing company behind the Smucker’s brand of jellies, as well as numerous other popular products that sell in the United States, Canada, and internationally. It primarily competes against ConAgra (NYSE:CAG), Kraft (NASDAQ:KRFT) and Hershey (NYSE:HSY), among other companies.

SJM is a member of the dividend achievers index, and has boosted distributions for 15 years in a row. The company’s last dividend increase was in July 2012, when its board approved an 8.3% increase to 52 cents per share. That has helped this dividend growth stock deliver an annualized total return of 11.6% to its shareholders during the past decade.

The company has managed to deliver an 8% average increase in annual EPS since 2003. Analysts expect J.M. Smucker to earn $5.15 per share in 2013 and $5.65 per share in 2014. In comparison, the company earned $4.06 per share in 2012.

Future increases in earnings likely would be generated by acquisitions and some by cost restructuring.

The company acquired Folgers Coffee by Procter & Gamble (NYSE:PG) in 2008. In 2011, it purchased privately held Rowland Coffee Roasters, and in 2012 it acquired Sara Lee’s North American Coffee and Hot Beverage division.

SJM also has taken the initiative to improve operations and production efficiencies, as well as improve its cost base. However, the company seems to be struggling with passing on cost increases over to consumers, as it recently had to decrease prices for Folgers coffee to maintain market share.

The return on equity has decreased from 13.7% in 2003 to 8.7% in 2012. Rather than focus on absolute values for this indicator, however, I generally want to see at least a stable return on equity over time.

The annual dividend payment has increased by 11.1% per year over the past decade, which is much higher than the growth in EPS. This was achieved mainly through the expansion in the dividend payout ratio.

An 11% growth in distributions translates into the dividend payment doubling almost every 6.5 years. If we look at historical data, going as far back as 1997 we see that J.M. Smucker actually has managed to double its dividend every 7.5 years on average.

The dividend payout ratio has increased from 37.6% in 2003 to 46% in 2012. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Smucker is slightly overvalued right now, trading at 21.1 times earnings and yielding 2.4%. I would consider adding to my position in the stock on dips below $81.50 per share.

Full Disclosure: Long PG

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