Recent Buy (9)

Purchases for my FI Portfolio have been few and far between the last few years.  That's not for lack of opportunities or desire rather it had to do with our lives being on a roller coaster.  However, there's a light at the end of the tunnel as our main goal for this year is to get rid of all non-mortgage debt and then refocus our energy towards building up the portfolio.  

We aren't contributing fresh capital to our investments just yet as we're focused on getting rid of our non-mortgage debt.  However, that doesn't mean that we're not able to make new purchases thanks to the dividends that keep rolling in from our other positions.

One of my goals for my FI Portfolio in 2019 is to build up the positions rather than build out the number of positions.  Essentially I want to get more exposure to the companies that I own instead of many small positions that make it hard to be motivated to monitor the company.  With the dividend growth strategy I still think it's fine since the bulk of the work should be done upfront; however, why invest more capital into your 20th or 30th best idea if one of the top 10 is attractively valued?  So that's just what I did.

I recently updated my valuation on J.M. Smucker and liked enough of what I saw.  The business has transformed over the last few years with their foray into the pet food/nutrition business which now accounts for ~38% of revenue.  Considering that market is forecast to grow significantly over the next decade that could be a great directional change for the company.  You can read my dividend stock analysis on J.M. Smucker over at Seeking Alpha.

I decided to put some of my cash to work by adding to my position in The J.M. Smucker Company.  On July 22nd I purchased an additional 10 shares of Smucker at $112.15 per share.  The total cost basis, including commissions, for this lot came to $1,126.45 or $112.65 per share.

Smucker is a Dividend Contender with 22 consecutive years of dividend growth.  Based on the current quarterly payout of $0.85 per share the YOC for this slug of shares is 3.02% and I can expect to receive $34 in dividends over the next year barring any future increases from the new shares.

I now own 20.318 shares of Smucker at an average per share cost basis of $109.38.  My entire position in 3M can be expected to produce $69.08 in dividends over the next year and carries a YOC of 3.11%.
  



Due to this purchase my FI Portfolio's forward 12-month dividends increased to $7,155.07.

Dividends

As a dividend growth investor any potential investment must Jerry Maguire me, i.e. "SHOW ME THE MONEEEEEEYYYY!!!!".  I judge that based on a company's history of both paying and growing dividends to shareholders.  With a 22 year streak of rising dividends I'd say that Smucker definitely qualifies.
 

*A full screen version can be found here.

Smucker's dividend growth has been much less consistent from year to year than I would have expected for a consumer staple.  However, all is well when we move out to longer time frames.  Out of the 12 rolling 10-year periods, Smucker's dividend growth rate has ranged from 8.6% to 11.7% average of 9.7% and a median of 9.9%.   

The 1-, 3-, 5- and 10-year rolling dividend growth rates since 1997 can be found in the chart below.  

*A full screen version can be found here.

Valuation

One valuation method that I like to use is dividend yield theory.  The idea behind dividend yield theory is that large, stable companies will see their dividend yields revert to their mean over time.  So when the yield is higher than "average", shares are undervalued and when it's lower than "average", shares are overvalued.

*A full screen version of this chart can be found here.

Since the dividend was initiated in 1997 Smucker's dividend yield has been relatively consistent in the 2-3% area.  The 5-year moving average dividend yield for Smucker sits around 2.53%.  Based on the $0.85 quarterly payout there's potentially 19.3% upside to "fair value".  

Another valuation check is Smucker's current P/E ratio compared to the 5 year average.  Over the last 5 years Smucker's traded hands at 22.4x TTM EPS on average with a range over the last 10 years of ~10x to 25x.  Based on FY 2020's estimate Smucker is trading at just 13.3x so there's potentially significant upside due to revaluation assuming a return to the 5-year average and modest upside assuming a market average multiple around 16x.

Smucker is also currently trading around a 16x EV/EBIT ratio which is relatively cheap, but not a deep discount by any means at roughly a 6.2% operating earnings yield.

Conclusion

I don't think Smucker is a "steal" at the current price; however, I do believe that the business is pretty high quality and trading on the lower end of fair value.  That was reason enough for me to put a little bit more capital to work and pick up some more shares.

The transformation that J.M. Smucker has undergone away from the namesake business and into the pet food area should hopefully offer more organic growth.  The valuation appears to have shares on the lower end of fair value with a decent chance to generate 10%+ annual returns over the coming years.  

I've started compiling the dividend history, growth rates and dividend yield theory for many dividend growth companies.  J.M. Smucker's can be found here and the remaining companies that I've already gathered the data on can be found here.  As new companies are added the list will be updated.

What do you think of my purchase of J.M. Smucker?  Do you like their transformation into the pet food business?