Our Top Pick for conservative investors is a company that manufactures and sells necessities that line our kitchens and pantries—coffee, peanut butter, jelly, piecrust, and pet foods just to name a few—observes Eric Vermulmn, portfolio manager of Stack Financial Management and contributing editor of InvesTech Market Analyst

Like its staple foods, shares of The J.M. Smucker Company (SJM) are a core holding in this aging bull market thanks to growth potential, unrealized earnings power, and an attractive dividend.

The Smucker name may be synonymous with jams and fruit spreads, but after 115 years in business it has developed into the eighth largest food and beverage company in the US.

It manufactures numerous brands including Folgers coffee, Jif peanut butter, Pillsbury cake mixes, Crisco shortening, and Dunkin’ Donuts coffee, all in addition to its namesake Smucker’s products.

In early 2015, SJM completed the acquisition of Big Heart Pet Brands, adding some of America’s best known pet foods and snacks—such as Meow Mix, Milk-Bone, and Kibbles ‘n Bits—to its product mix.

The company now generates over 60% of its sales from the Coffee and Pet Food segments, which are both expected to grow faster than other food categories in coming years.

Management has done a great job of expanding the company’s product lines, which has resulted in rising earnings and a growing dividend. 

Over the past ten years, the company’s profits have increased at 8% per year through both internal innovation and well-timed acquisitions. SJM expects to continue this pace of expansion, guiding to earnings per share (EPS) growth of approximately 8% per year for the near future.

As profits have increased, so has the dividend. SJM has raised its dividend for 14 consecutive years, with an average 11.1% annual growth rate for the past five years.  This year, SJM will pay $2.68 per share in dividends, equivalent to a 2.2% yield.

With shares selling under $125, SJM trades at a discount to its peers and has the best free cash flow (FCF) yield in the industry. The company is currently guiding to 2016 EPS (fiscal year ends April 30) of $5.75 or a P/E ratio of 21.4. 

However, this EPS estimate is net of amortization from the Big Heart acquisition.  Adjusting for this non-cash expense, SJM’s management expects EPS of $6.90, equivalent to a P/E of 17.8, over a 20% discount to close peers. 

The company’s earnings are expected to translate into $925 million of free cash flow, which equates to a 6.4% FCF yield. Such strong cash flow is rare in this market, particularly in a defensive Consumer Staple, making SJM a timely portfolio addition for 2016.

Note: Clients and individuals associated with Stack Financial Management hold positions in—and may from time to time make purchases or sales of—this security.

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