J M Smucker Co Is Offering Pandemic-Proof Dividends
A Reliable Dividend Stock for Income Investors
Before the COVID-19 pandemic, there were a lot of companies known for providing increasing dividends. But since the virus hit, things got so bad that some of those companies had to cut their payouts—or at least put a stop to their dividend-hike streaks.
The reality is, the economic impact from the pandemic is huge, and in many ways it’s different from that of a normal recession (if you can call any recession “normal”). A lot of businesses had to close their doors to comply with the law, and consumers stopped shopping for many things not necessarily because of a budget constraints, but because the shops weren’t open.
Although the coronavirus pandemic is temporary, the impact has resulted in many companies re-evaluating their dividend policies. If you want to live off dividend income, you certainly don’t want the companies in your portfolio to cut their payouts.
And that brings us to the company I want to talk about today: J M Smucker Co (NYSE:SJM). While nothing is carved in stone, it looks like SJM stock is capable of providing pandemic-proof dividends.
To American consumers, Smucker is a familiar name. The business started back in 1897 and has grown to become one of the biggest companies in the consumer packaged goods industry. The company now has more than 40 brands, including iconic products like “Smucker’s” jam, “Jif” peanut butter, “Folgers” coffee, and “Milk-Bone” dog biscuits. It is estimated that 90% of all U.S. households have at least one of Smucker’s products. (Source: “2020 Consumer Analyst Group of New York Conference,” J M Smucker Co, last accessed July 28, 2020.)
In ordinary times, J M Smucker’s business wouldn’t be considered exciting by any stretch of the imagination. But in a pandemic environment, where people are afraid to go out and they have been stocking up on essential supplies, Smucker can perform better than most companies.
Just take a look at its latest earnings report and you’ll see what I mean. Smucker operates around a fiscal year that ends on April 30, so its most recent earnings report was for the fourth quarter of its fiscal 2020.
For the quarter, J M Smucker generated $2.1 billion of net sales, representing a 10% increase year-over-year. The strong top-line growth was driven by higher volume/mix in the company’s “U.S. Retail Consumer Foods,” “U.S. Retail Coffee,” and “U.S. Retail Pet Foods” segments. (Source: “The J. M. Smucker Company Announces Fiscal 2020 Fourth Quarter Results,” J M Smucker Co, June 4, 2020.)
The bottom-line result was even more impressive, as Smucker’s adjusted earnings came in at $2.57 per share for the April quarter, up 24% from the year-ago period.
The company also increased its free cash flow in the fourth fiscal quarter by 16.4% year-over-year to $211.3 million.
In J M Smucker’s June earnings conference call, President and Chief Executive Officer Mark Smucker made it clear about how the pandemic affected the business: “In March, the COVID-19 pandemic led to stay at home orders across the world, which resulted in unprecedented demand as consumers loaded their pantries and consumed more food and beverages at home.” (Source: “The J. M. Smucker Company (SJM) CEO Mark Smucker on Q4 2020 Results – Earnings Call Transcript,” Seeking Alpha, June 4, 2020.)
Therefore, it shouldn’t come as a surprise that J M Smucker is increasing its cash returns to shareholders, despite this unprecedented environment. On July 21, the company’s board of directors declared a quarterly dividend of $0.90 per share, marking a two-percent increase from the previous payout. The new dividend is payable on September 1 to shareholders of record as of August 14. (Source: “The J. M. Smucker Company Announces Dividend Increase,” J M Smucker Co, July 21, 2020.)
Note that this marked the company’s 19th consecutive annual dividend increase.
The payout remained safe, too. In Smucker’s fiscal-year 2020, it generated adjusted net income of $8.76 per share while declaring cash dividends of $3.52 per share. So the profit covered the payout more than twice over. (Source: “The J. M. Smucker Company Announces Fiscal 2020 Fourth Quarter Results,” J M Smucker Co, June 4, 2020, op. cit.)
Things look just as solid if you use free cash flow instead of earnings as a measurement. For the fiscal year, J M Smucker generated $985.5 million in free cash flow. Its dividend payments, on the other hand, totaled $396.8 million. Therefore, the company had a free cash flow payout ratio of 40.3% in its most recent fiscal year, leaving a wide margin of safety.
Of course, there is uncertainty going forward. And the company has said that, while the pandemic can lead to increased at-home consumption, its “Away From Home” business could see an extended decline in sales.
Still, the Smucker stock dividend should be safe. For the company’s fiscal-year 2021, management is projecting adjusted earnings per share of $7.90 to $8.30 and free cash flow of $900.0 to $950.0 million. Those numbers would cover the dividend payments to SJM stock investors with ease.
Bottom Line on J M Smucker Co
Trading at $109.11 per share, Smucker stock offers an annual dividend yield of 3.3%.
Admittedly, you can find plenty of higher-yielding names than this peanut-butter-and-jam company. But by providing a dividend stream that grows through thick and thin, J M Smucker Co could be a good fit for a risk-averse investor’s income portfolio.