As dividend growth stocks go, I like consumer staples companies with dominant market share or ones that are the major players in niche markets. One has to only look at the success of Hormel Foods Corporation (HRL), McCormick & Company (MKC), PepsiCo Inc. (PEP), and Coca-Cola Company (KO) to understand why. These companies dominate their respective market areas of branded meats, spices, salty snacks, and non-alcoholic beverages. In turn, this has translated into solid capital return to shareholders through dividends and share buybacks over many years.
In this article, I discuss J & J Snack Foods Corp. (JJSF), a mid-cap consumer staples company. J & J Snack Foods is probably not well-known to most investors, but it has strong brands in soft pretzels, frozen ices and drinks, funnel cakes, and other snacks. The company is a Dividend Contender, having raised the regular dividend for 14 consecutive years. The total annual return for the company with dividend reinvested in the past 10 years has crushed that of the S&P 500 at ~18.4% versus ~13.2%. This is not easy for a consumer staples company and points to a strategy that is working and has excellent operational execution. The company has grown the top line for 48 straight years, which validates its strategy and execution. In turn, this has led to a high valuation of about 35X based on earnings. Although I like the company’s operational excellence, the high valuation, combined with margin pressures, are keeping me on the sidelines for now.