This Undervalued Stock Has a 5% Dividend Yield, but Is It a Value Trap?

On the Sept. 21, 2026, episode of The Morning Filter podcast, hosts Susan Dziubinski and Morningstar Chief US Market Strategist Dave Sekera explain why Scotts Miracle-Gro SMG stock’s recent selloff may have created an opportunity for investors. Here is an excerpt from the show.

Is Scotts Miracle-Gro a Value Trap?

Susan Dziubinski: Scotts Miracle-Gro was a pick a couple of times in 2025, and then again on the March 23 show this year. Stock is down more than 20% since reporting in July, and at the time the company reduced guidance. At the time, Morningstar reaffirmed its fair value estimate of $80 on the stock. What do you think of it today, Dave?

David Sekera: This is an interesting stock in the perspective of looking how it trades in the short term, as well as what I consider over the longer term. In the short term, as you mentioned, it’s been a really volatile stock. I mean, it was a 4-star stock when it was trading in the low $50s. It was, I don’t know, above $70, went to 3 stars, and now it’s back to its lows again. But if I look at how the stock has performed going all the way back to mid-2022, I’d say it’s in that generally $50-$70 range and has been trading back and forth several times.

As you mentioned, I think the real question with this one is: Is this a value trap? And let me just kind of walk through why we don’t think it is, but it looks like one here in the short term. The market hates nothing more than seeing earnings contract. And when earnings are contracting, people just want to get out. Of course, everyone’s looking for growth stories, and we are forecasting the operating margin to contract next year. A lot of that is just due to higher commodity and chemical prices, higher transportation prices, and a lot of that due to the conflict in Iran and really what’s going on in the Middle East.

We are looking for earnings to decline in 2027 down to $4.09 per share, down from $4.35 here in 2026. Based on 2027 earnings, the stock’s now trading at under 13 times our 2027 estimate. It really does look cheap as long as you expect earnings to recover. In my mind, and I think about this stock, it is a 2028 story right now. If you open up our model and take a look, we are looking for two and a half percent revenue growth. We are looking for margins to begin improving once again, and that’s really just going to be based on a combination of prices increasing, catching up with inflation, more normalization in energy and chemical prices, and so forth. And so then, we’re looking for earnings of $4.69 in 2028, and we’re looking for it to then continue to keep growing thereafter. So, if they are able to hit what our expectations are, I do think the stock is very undervalued.

I’d say the good thing about this stock for now is that you are clipping a 5% dividend yield. According to our write-up here, our analysts noted the company does plan to maintain that dividend. And then once their leverage ratio falls below 4 times, they’ll start using free cash flow in order to repurchase shares as opposed to paying down debt. We expect that probably happens sometime in the next couple of quarters. Once you get them repurchasing shares, especially when the shares are at such a large discount that adds economic value, plus from a technical point of view, I think that helps put in a floor on the stock. But again, as an investor, I think you really have to look at this as being much more of a 2028 story than even a 2027 story.

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