If someone asked me to name a food company that generates the most enduring, highest quality profits from around the globe that consists of an empire built to last more than our lifetimes, my answer would be Nestle. The ability of a company that large to achieve double-digit growth in good years puts the food giant into a class that has few peers. Now, what makes life interesting is this: If you are an American investor, it is often difficult to access shares of Nestle without the handicap of paying Swiss taxes on your dividends (this is especially unavoidable if you are investing through an IRA, as dividends from Switzerland do not receive the tax-exempt status that dividends from countries like Great Britain give American investors.
Because of that handicap, a company like J.M. Smucker comes pretty darn close to achieving equality with Nestle. J.M. Smucker is one of those companies that should achieve no-brainer status for those of you looking to make decisions today that will generate cash for you decades from now (much like how Warren Buffett’s investment in See’s Candies forty-something years ago now pays him more in profits every six months than the $25 million he spent buying the company outright). If someone told me they had purchased substantial amounts of stock in Coca-Cola, Johnson & Johnson, Exxon, Colgate-Palmolive, Hershey, and Procter & Gamble, I would say that buying J.M. Smucker ought to be the next position to build up.
I have a special affection for the company because it is much smaller than many of the other companies I discuss here. Companies like Coca-Cola, Johnson & Johnson, and Exxon have valuations in the $250-$500 billion range. The advantage of their extensive size is that they will be around for our entire lifetimes, and they have the diversity of profits that make it highly likely you will never have to deal with the kind of regret that faced the shareowners of GT Advanced Technologies when the would-be Apple supplier filed a Chapter 11 bankruptcy that is poised to wipe out the entire investments of people who put their money into the stock.
The downside with companies that big is that it is extraordinarily difficult to achieve returns north of 12% with companies that big (though Exxon might have an outsized change if we had a decade where oil prices led us to $7 per gallon gas at the station or something like that). When you buy Coca-Cola or Johnson & Johnson, are you locking yourself into a long-term growth rate in the 8-12% range. Obviously, you can tell by my history of writing that I don’t consider this a bad thing—I’ll take the certainty of long-term 8% returns any day of the week, especially given that I define success as “avoiding bad outcomes” as much as I define it by achieving desirable results.
It is in that backdrop that I think about J.M. Smucker. This ccompany, compared to just about everything else I cover, is incredibly tiny. This is a company that, depending on stock market fluctuations, is worth between $8 and $16 billion. Exxon makes enough profit in a year to buy J.M. Smucker outright!
And yet, despite this small size, it has the collection of brands that are going to be around for a very, very long time. When you buy shares in J.M. Smucker, you are accessing a company with diversified divisions that all would make excellent standalone businesses. They have a peanut butter division that sells Jif. They own Crisco shortening. They have very strong footing in the baked mix division, which consists of Hungry Jack and Pillsbury. In the coffee market, they own Folger’s. They have a special licensing agreement that allows them to sell Dunkin Donuts Coffee in grocery stores across the country (this is quite similar to Coca-Cola’s distribution deal to sell Dr. Pepper in many locations).
I see J.M. Smucker is having the perfect combination of small size and high quality. It was really lucrative buying shares of Coca-Cola before it began selling its signature beverages across the globe. There’s a certain infancy to J.M. Smucker that means you have an outside chance of doing extraordinary well holding the stock for the next few decades, and a more than reasonable chance of achieving total returns north of 8% annually without an expiration date. It’s a great signature holding to consider.
Take the last five years for example, a time that has been generally been somewhat difficult for food stocks because the ingredients costs were rising coming out of the recession and consumers were reluctant to pay higher prices when General Mills, Kellogg, Nestle, and Kraft tried to pass those costs onto customers. Smucker, meanwhile, has grown revenues 7.5% annually over this time period. The growth has a long-term record of amount to 10.0% each year, and when factor in the 2% dividend yield, you have a very good chance of earning long-term returns of 12% annually with this stock.
Why doesn’t everyone buy it? The price never looks like it is on sale. The people who spend their lives owning J.M. Smucker know the quality of the company, and you can’t really count on getting a discount with the stock. There was a brief period in early 2009, when many investors were losing their minds and/or didn’t have the capital to make as large investments as they wanted, when the stock price fell to $34 per share. It was earning $4.37 per share in profits at the time. You don’t have to get a calculator out to see what a once-in-a-lifetime opportunity that presented.
Interestingly enough, this was yet another classic example of where business performance did not justify the drop in stock price. From 2008 through 2009, J.M. Smucker grew its profits from $3.77 to $4.37. The dividend grew from $1.31 to $1.45. The regret of selling low is something out of the Grinnell-trustees-sold-Intel-stock playbook, as 2014 profits grew to over $6 per share and the annual dividend hit $2.56.
When I write about stocks, I want to write about companies that you can feel confident holding 100% of the time. Anything less than that—say, a 95% confidence level—becomes useless because that 5% will come around in years like 2009, prompting you to sell at an all-time level meaning you would have been much better off collecting 2.5% from U.S. government bonds. I don’t know what more you could ask for than J.M. Smucker—you would have to go back to the 1998-1999 period to find a time when annual profits didn’t grow (they went from $1.29 to $1.26). The dividend goes up every year, and only accounts for 40% of profits (unlike many of J.M. Smucker’s peers which pay out 60% of profits as dividends). When the price goes down, you can go to the grocery store and see people buying Pillsbury, Folger’s, Jif, and Crisco, making the business come alive in a way that isn’t apparent by looking at the letters SJM on a computer screen. If you want conservatism and growth, Smucker fits the bill. Every share of Smucker bought in 1994 multiplied into 6.8 shares today, counting dividends reinvested and stock splits.
Originally posted 2015-02-02 10:20:11.