3 Reasons Why This Dirt Cheap High-Yield Dividend Stock Is a Buy for the Second Half of 2025
Packaged food companies are in an industry-wide downturn.
J.M. Smucker continues to generate excellent free cash flow to support its growing dividend.
The stock's valuation is beyond cheap.
10 stocks we like better than J.M. Smucker ›
J.M. Smucker's (NYSE: SJM) stock price tumbled 15.6% on Tuesday after the packaged food giant reported fourth-quarter fiscal 2025 results and updated its fiscal 2026 guidance. The stock price of the maker of Uncrustables, Folgers, Jif peanut butter, Twinkies, pet brand Milk-Bone, and other products is now hovering around its lowest level in over a decade.
Here are three reasons why the sell-off has made J.M. Smucker too cheap to ignore, and why the high-yield dividend stock is a great buy for the second half of 2025.
Net sales fell 3% year over year in J.M. Smucker's Q4 but were still up a solid 7% for the full fiscal year. Adjusted earnings per share (EPS) rose 2% to $10.12. For fiscal 2026, the company expects net sales to increase by 2% to 4%, but adjusted EPS to fall to $8.50 to $9.50.
The stock is likely taking a hit because earnings are sliding, and it remains to be seen if the company will be able to pass along cost pressures to consumers. For example, coffee net sales rose 11% in the company's latest quarter, but that was heavily due to price increases from June and October of last year. J.M. Smucker is dealing with record-high green (unroasted) coffee production costs. So it plans to hike prices again in May and stage yet another price increase in August.
J.M. Smucker said it will be able to offset higher costs if the price increases work. But if customers push back on these price hikes, then sales volumes would decline, affecting profitability. However, the company believes that its at-home coffee brands will appeal to people looking for affordable experiences outside of coffee shops.
Price increases are happening across the company's portfolio. J.M. Smucker just increased prices on its popular Uncrustables sandwiches for the first time in over three years, as net sales in its Frozen Handheld and Spreads segment ground to a halt.
For pet foods, the company is seeing good results from its Meow Mix cat brand, but weakness from dog brand Milk-Bone as consumers pull back on discretionary spending -- like on dog treats.
Sweet Baked Snacks continues to be one of the worst performers for J.M. Smucker, dragged down by Hostess. J.M. Smucker bought Hostess Brands in November 2023 for $5.6 billion -- which, in hindsight, was not a good use of capital.
For context, J.M. Smucker's market cap has fallen to just $10.05 billion -- and Hostess is not even close to being worth half of the company. In J.M. Smucker's latest quarter, Sweet Baked Sales was the company's smallest segment by revenue, generating roughly 12% of total net sales. The segment had by far the worst comparable results, with net sales down 26% year over year. Longer term, J.M. Smucker expects the Sweet Baked Snacks segment to achieve just 3% net sales growth per year.
J.M. Smucker generated $816.6 million in free cash flow (FCF) in fiscal 2025, which was plenty to cover $455.4 million in dividend payments. For fiscal 2026, management expects even higher FCF of $875 million, which is roughly double its dividend. On the earnings call, management said that it is confident in the company's ability to deliver $1 billion in annual FCF over the long term.
Despite lackluster results, J.M. Smucker maintains a cash flow that can support its growing dividend. The company has raised its dividend for 29 consecutive years, making it a reliable source of passive income. Its yield has ballooned to 4.6% due to the sell-off in the stock and continuous dividend raises.
Typically, when a company's yield jumps, it can be a red flag that its dividend is becoming unaffordable. But that's not the case with J.M. Smucker.
The company has an FCF yield of 6.5%, meaning it could theoretically support a 6.5% dividend yield if it funded the whole expense with FCF. Based on the company's long-term guidance for $1 billion in FCF and a market cap around $10 billion, simple math tells us that J.M. Smucker would have an FCF yield of a whopping 10% if its stock price stayed depressed and it hit its FCF target.
All told, J.M. Smucker is a solid source of passive income even during this challenging operating environment.
Based on its fiscal 2026 guidance for $875 million in FCF and $8.50 to $9.50 in adjusted EPS, J.M. Smucker has a forward price-to-FCF ratio of just 11.5 and a forward price-to-earnings ratio of 10.5 at the midpoint of its adjusted earnings guidance. These are bargain-bin levels, even for a traditionally low-growth company.
For context, J.M. Smucker's 10-year median price-to-FCF ratio is 15.4, and its 10-year median P/E is 21.6. This suggests that the company is being valued at a steep discount compared to historical averages.
J.M. Smucker stock is under pressure because its earnings are falling, and it increasingly relies on price hikes to offset costs across key categories. During inflationary periods, investors may want to take caution when looking at a company's sales growth and focus more on operating margins and earnings.
J.M. Smucker is guiding for a slight increase in net sales in its upcoming fiscal year. But if costs are rising at an even faster rate, it's really a net negative in sales growth. Cost pressures and potential volume declines are likely why J.M. Smucker is guiding for lower earnings in fiscal 2026.
The outlook is bleak, but J.M. Smucker has already delivered a lot of bad news, setting the stage for a recovery in the stock even if results are just mediocre. For example, the company has reset expectations for Hostess so investors can digest the poor acquisition and move on. Investors can also appreciate that the company is foreshadowing price increases to offset costs, rather than surprising them later in the fiscal year.
There are valid reasons for the stock's pullback, but J.M. Smucker is simply too beaten down for a company that continues to generate tons of FCF and can afford to grow its dividend.
Investors are getting an opportunity to scoop up shares of this high-yield dividend stock at a bargain level, making it a great buy for the second half of 2025.
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Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends J.M. Smucker. The Motley Fool has a disclosure policy.
3 Reasons Why This Dirt Cheap High-Yield Dividend Stock Is a Buy for the Second Half of 2025 was originally published by The Motley Fool
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