Summary: McCormick (MKC) is a good company trading at a good price. It has a strong market position and is executing well. It has a current dividend yield of 3.3 percent, has raised its dividend for more than 20 years, and there is nothing on the horizon to suggest that it will not continue to do so.
Type of Company and Stock: In Morningstar’s Style Box, McCormick is classified as a mid-cap core company. (In Morningstar’s parlance, “core” means that the stock is a hybrid of “growth” and “value” types.) The company’s business is mainly built around spices and seasonings. It serves both consumer and business segments.
Company Story and Strategy: McCormick is the worldwide leader in manufacturing, marketing, and distributing spices, herbs, extracts, seasonings, and other flavorings to the food industry. At over twice the size of its nearest branded competitor, it is the largest producer of, and controls about half the market for, spices and seasonings in North America. Its market leadership position, established customer relationships, and effective distribution system give it competitive advantages, including a degree of pricing power. Its leading brands include McCormick, Lawry's, Zatarain’s, and Thai Kitchen. While the spice-and-seasonings business at first glance sounds old and established, McCormick is innovative and constantly introducing new flavors, such as unique ethnic seasonings. In 2007, about 10 percent of its sales were from products introduced in the preceding 3 years. It has also expanded its business through strategic acquisitions of Thai Kitchen, Simply Asia, and Lawry's.
On the consumer side, McCormick’s customers include grocery chains, mass merchandisers, warehouse clubs, and the like. On the business-to-business (“industrial”) side, a market it dominates, its customers are packaged food, beverage, and restaurant companies.
McCormick participates in the globalization megatrend. About 40% of sales come from international markets (it sells into about 100 countries), and it is actively attempting to grow its international presence.
Financials: McCormick has pretty steady financials, with revenue and EPS growth rates in the high single digits, ROE at 24 percent (greater than 15 percent for more than 5 years), and average debt levels. (All figures are from Morningstar.) In the recently completed first quarter, the company was hurt by unfavorable foreign exchange rates. Total sales declined 1 percent year-over-year, a number which would have been +7 percent but for the impact of unfavorable exchange rates. On the positive side, the company was able to expand its margins in both consumer and industrial segments, the result of an ongoing cost-cutting and restructuring program plus price increases. Despite the restructuring, it is good to see that McCormick is maintaining a healthy R&D level, given that innovation is an important growth driver for this company. McCormick maintained its 2009 guidance of 2-4 percent sales growth and 7-9 percent earnings growth.
Dividends: McCormick pays dividends quarterly and typically increases them with the final payment each year. The company has paid dividends since 1925 and increased them for 22 years straight.
Its current yield is 3.3 percent (compared to the S&P 500’s 3.0 percent), and its trailing 3-year average dividend growth rate has been 11 percent. If that rate of growth continues, the dividend return (on initial cost) will double in about 7 years. Under the Ten-by-Ten approach to dividend investing, McCormick will be returning 10 percent on cost in dividends alone in its 10th year after purchase.
Stock Performance and Valuation: McCormick’s stock has outpaced the market in total returns for the trailing 1-, 3-, 5-, and 10-year periods. It is down about 8 percent so far in 2009, just about equal to the S&P 500’s average return for the year.
The stock’s valuation ratios all clock in at a little better than the market’s historical averages: P/E of 16, Forward P/E of 12, P/CF of 13, PEG ratio of 1.3, and so on. I rate the stock’s valuation as “Good” at its recent price of $29.34.
Investment Thesis and Conclusion: On the demanding company scoring system that I use for dividend-paying stocks, called Easy-Rate™, McCormick garners 34 (of a possible 74) points, which grades out as “Good.” This, combined with its “Good” valuation, solid financials, and strong record of dividend growth, rate it an attractive stock for dividend investors at its current price.
McCormick is not among my current holdings, but it is on my Shopping List for potential purchase with new money.
Disclosure: no positions