The Scotts Miracle-Gro Company (SMG) manufactures, markets, and sells consumer lawn and garden products in the United States and internationally. The company operates through three segments: U.S. Consumer, Hawthorne, and Other.
The company is a member of the dividend achievers index, having raised dividends for 12 years in a row. During the past decade, the company has managed to grow dividends at an annualized rate of 12.30%. Dividend growth has slowed down over the past five years to 5.50%/year however.
The last dividend increase was in July 2021, when the company hiked its dividend by 6.45% to 66 cents/share.
The company has managed to increase earnings from $2.54//share in 2011 to $6.81/share in 2020. The company is expected to earn $9.19/share in 2021.
The company operates in two segments. The first is US Consumer, which accounts for 72% of sales and 89% of profits. It offers lawn fertilizer, grass seed, as well as weed, pest and disease control and outdoor cleaners. Over 60% of sales from this segment occur at Wal-Mart, Home-Depot and Lowe’s.
The second is Hawthorne, which accounts for 21% of sales and 9% of profits. It is the indoor, urban and hydroponic gardening business. Sales are targeted towards the cannabis industry in the US and Canada.
The other segment does 7% of sales and 2% of profits. It includes their consumer lawn and garden business outside the US, as well as sales to commercial and professional customers.
Americans love spending money on their lawns and gardens, so this is an annual recurring expense in a way. It is likely that demand will remain high, even if consumers have more options of activities outside their homes. Long story short, people will keep spending on their lawns and gardens in the long run, and demand will likely remain high.
The Hawthorne segment would likely grow faster over time, as more states legalize cannabis and there is the potential for legalization at the Federal Level in the coming few years. The company is a picks and shovels play on this upcoming boom in growing recreational cannabis.
The company is exposed to some commodity fluctuations, but it manages to hedge a large portion of them. Strategic acquisitions can assist in growth too.
The dividend payout ratio started out at 41% in 2011, but has been higher in the past. It does seem lower today at 35%. I believe that the lower payout ratio provides the opportunity for dividend growth that may be slightly faster than the growth of earnings per share.
The company has managed to reduce the number of shares outstanding gradually over the past decade. The number of shares outstanding went down from 66 million in 2011 to 56 million in 2020.
While the company pays a regular dividend, and does share buybacks, it also rewards shareholders with special dividends from time to time. It paid $5/share in 2020, $2/share in 2014, and $8/share in 2007.
The stock is fairly valued at 15.77 times forward earnings and yields 1.82%
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