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McCormick & Company (NYSE:MKC) April 28, 2009 close: $28.92
52-week range: $28.08 (Apr. 16, 2009) - $42.06 (Aug. 6, 2008)
Dividend = $0.24 quarterly = 3.32% current yield

McCormick is a leader in the manufacture, sales and distribution of spices, seasonings, flavorings etc. to both consumer and industrial markets. About 42% of sales come from outside the US.

This is a very steady performer. FY 2008 [ended November 30, 2008] market the 12th straight fiscal year with increased EPS and dividends. Last years revenues came in at $3.176 billion and earnings were an all-time high at $2.14 /share.

Zacks is looking for $2.30 and $2.49 for FYs 2009 and 2010 making MKC’s forward P/E about 12.6x and 11.6x for 2009 and 2010 respectively. That compares with a 10-year median multiple of 19x.

The current yield is now 3.32% which is better than the rates now available on CDs and most Treasury notes. It’s well covered and among the highest payouts ever for this very conservative issue.

Value Line notes McCormick has an ‘A’ financial strength rating. They also classify MKC as being in the very top percentile in both ‘stock price stability’ and ‘earnings predictability’. Their 0.6 Beta is very low. Value Line rates McCormick’s safety in their highest ranking.

Here are their per share numbers as reported by Value Line:

FY….... Sales …...C/F …..EPS…..Div …... B/V ….. Avg. P/E
2003 ....16.53 …. 1.93 ….1.40 … 0.46 …. 5.50 …… 18.3x
2004 ....18.60 …. 2.10 ….1.51 … 0.56 …. 6.55 …… 22.0x
2005 ....19.55 …. 2.24 ….1.61 … 0.64 …. 6.03 …… 21.3x
2006 ....20.88 …. 2.45 ….1.72 … 0.72 …. 7.17 …… 20.0x
2007 ....22.82 …. 2.64 ….1.92 … 0.80 …. 8.49 …… 19.4x
2008 ....24.42 …. 2.83 ….2.14 … 0.88 …. 8.11 …… 17.2x

The April 28 closing price of $28.92 does not seem to reflect the outstanding and steady growth from this high-quality company.

A return to even a fifteen multiple on this year’s estimate of $2.30 would lead to a target price of $34.50 by year end. The resulting $5.58 capital gain would be a 19.3% rise. Add in the 3.3% yield and you could easily see a total return of over 22% in the next 8 -10 months.

Is that a crazy goal? McCormick shares hit $33.40 already this year and had peak trading prices of $38.90 - $42.10 in each calendar year from 2004 right through 2008. Fundamentals are better now than they were over that entire period when the shares traded significantly higher.

I’m a buyer of the shares right here and a seller of December $30 puts.
These puts have traded as high as $3.30 /share today giving you a break-even point of $26.70 should you end up being exercised. That worst-case buy price is lower than the lowest price that MKC shares have actually changed hands since 2003.

Total return of this trade would be figured as follows:

…………………………………......... Outlay ... Cash Inflow
Buy 1000 shares @$28.92 ..........$28,920
Sell 10 Dec. $30 puts @$3.30 …………......... $3,300
Net Cash Out-of-Pocket ….......… $25,620

If MKC climbs by $1.08 or + 3.8% to > $30 by December 18th:

  • Your $30 puts will expire worthless.
  • You will hold shares worth at least $30,000.
  • You will have received $480 in dividends.
  • You will no further option obligations.

Your minimum value will be $30,480 on the original outlay of $25,620.

That’s a total return of $4,860/$25,620 = 18.96% on shares that only need to rise by 3.8% from inception date.

If MKC shares do go to the projected price of $34.50:

You’ll hold shares and dividends with a value of $34,980 for your original outlay of $25,620.

That would represent a total return of $9,360/$25620 = 36.53%.
Not too bad for less than seven months holding a quite conservative stock.

The worst-case scenario would be if MKC stayed below $30 through expiration date:

  • Your $30 puts would be exercised.
  • You would be forced to buy another 1000 shares and to lay out an additional $30,000 cash.
  • You would end up with 2000 shares of MKC.
  • You would have collected $480 in dividends.

Break-even on the whole trade:

On the first 1000 shares it’s their purchase price of $28.92 /share.
On the ‘put’ shares it’s the $30 strike price less the $3.30 / share put premium = $26.70 /share.

Your overall break-even would be the average of $28.92 + $26.70/2 = $27.81 /share.

Thus, even if MKC shares dropped by $1.11 or 3.8% from the original cost you would not suffer a loss. While nothing is guaranteed I can tell you that MKC shares have not traded as low as that break-even price in more than five and one-half years.

Disclosure: Author is long MKC shares and short MKC puts.

Source: McCormick: Spicy Returns from a Conservative Stock