The Strait of Hormuz Is Causing Issues for Scotts Miracle-Gro. How Should You Play the High-Yield Dividend Stock Here?

JPMorgan recently downgraded Scotts Miracle-Gro (SMG) to Neutral from Overweight, citing the increased costs that the company will have to pay due to the war against Iran. But if the war ends relatively soon, the higher costs associated with it are likely to dissipate over the longer term. Further, SMG offers a rather high dividend yield, and its profits are expected to increase significantly in the coming years, which serve as two potential, positive catalysts. Finally, the company's valuation is fairly attractive.

In light of these points, I believe that patient, conservative investors and value investors with long-time horizons should buy the shares. 

About SMG Stock

Scotts provides products that facilitate the growth and health of lawns and gardens. 

In its December quarter, the company's sales fell 3% versus the same period a year earlier to $354.4 million, while its EBITDA, excluding certain items, climbed to $3 million from $900,000. 

The stock has a forward price-earnings ratio of 14.58 times, a market capitalization of $3.5 billion, and a dividend yield of 4.25%.  

More About JPMorgan's Downgrade

The bank predicted that SMG's raw-material costs would rise significantly during its current fiscal year due to the war, with the amount that it shells out for urea, diesel, and polyethylene all climbing meaningfully. As a result, JPMorgan cut its FY27 earnings per share estimate for the company to $4.35 from $4.65, and it reduced its price target on the name to $67 from $70.

If The War Ends Fairly Soon, Long-Term Commodity Costs Could Ease 

On March 30, President Donald Trump reported that Iran had accepted “most of” the United States' 15-point peace plan. While an Iranian spokesperson countered that the U.S. initiative includes “largely excessive, unrealistic, and unreasonable demands,” the spokesperson does not appear to have directly said that Trump's statement was inaccurate.

Further, both the U.S. and Iran have strong motivations to end the war relatively soon. High oil prices caused by the war are hurting America's economy. And Iran's president has warned that its economy could “collapse within weeks.", Further, many Iranian officials are being killed, and its defense-industrial base is being crippled by the U.S. and Israel.

When the war between Russia and Ukraine broke out in 2022, the prices of many commodities surged. But they eventually dropped a great deal, even though the war rages on.

Therefore, it's likely that over the longer term, the prices of SMG's commodities will decline sharply if the Mideast conflict ends shortly.  

SMG's Two Potential Positive Catalysts

In the short-to-medium term, while gasoline prices remain elevated, many U.S. consumers are likely to spend more time at home, and some of them may put more effort into gardening and working on their lawns. Such a trend would likely boost Scott Miracle Gro's financial results meaningfully. 

Secondly, although SMG sold control over its cannabis-related business, it retained an equity stake in the unit. Meanwhile, Trump is looking to ease the legal restrictions on cannabis. Over the longer term, the cannabis business, which sells lighting and nutrients for cannabis plants, can get a huge boost if Trump's efforts are successful. 

A High Yield, Rising Profits, and a Fairly Attractive Valuation

SMG has a 4.25% dividend yield, and analysts on average predict that its EPS could climb to $4.27 during this fiscal year and $4.67 in fiscal year 2027, versus $3.74 last year. While higher costs could eat into its profits for the next six months or so, I expect those cost pressures to ease in the long term. 

SMG is changing hands at a relatively low forward price-earnings ratio of 14.58 times.