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by Mark Bern, CPA CFA

McCormick (MKC) is a leading manufacturer and distributor of spices, seasonings, and flavorings for consumer, industrial and foodservice markets. The company derives 42% of revenue from outside the U.S. McCormick pays a dividend of $1.24 per share to yield 2.5% on the current price of $50.21 (quotes from late afternoon on Friday, February 24, 2012). The company has increased its dividend in each of the past 25 consecutive years. It has increased the dividend at a compound annual rate of 9.1% over the past five years. Do you wish you could get a raise of 9.1% a year? If you had owned MKC, you would have. And I have every reason to expect that the company will continue at that pace over the next five years.

I don't know about you, but I don't expect consumers to use fewer seasonings in their food anytime soon. Likewise, I don't expect the Colonel to change his secret seasoning recipe on the chicken. What I do expect is for consumer who are just entering the middle class in emerging markets all around the world to develop more of a taste for seasonings as they begin to consume more, eat out more, and change their habits. The big winner in this process is McCormick.

Let's look at how MKC scores on the report card relative to the industry averages. I prefer comparing companies to industry peers rather than the broader market because each industry has unique requirements in areas such as debt, labor intensity, marketing, and the like. Thus, comparing to industry averages provides me with what I believe is a better gauge of how well a company is managed.

Ratio / Measure

MKC

Industry Ave.

Pass / Fail

Ave. Annual 5-Yr Earnings Growth

10.2%

8.5%

Pass

Net Profit Margin

10.4%

6.3%

Pass

Debt to Total Capital

37%

32%

Neutral

Return on Total Capital

14.5%

10%

Pass

Dividend Yield

2.5%

2.5%

Neutral

Payout Ratio

39%

42%

Pass

Price-to-Earnings

18.0

18.4

Pass

All in all, MKC rates a good report card. I look for companies that have ratios and dividends that are either equal to or better than the industry average. I allow for relatively small variances from the industry average when assigning a neutral rating. In this case, the 37% debt to total capital ratio compared to the industry average of 32% is relatively minor, so it got the neutral rating.

The company still has a strong balance sheet, a credit rating of "A" from Standard & Poor's, and plenty of flexibility to invest in expanding the operations of the company. The return on total capital ratio, at 14.5% is 45% above the industry average and, when combined with the company's return on equity ratio of 21%, tells me that management is putting that borrowed capital to work very efficiently relative to its peers.

It is also worth noting that the company has achieved 15 years of consecutive increases to earnings per share. That is an enviable record considering that it spans two very difficult recessions. The stock may not be immune to the strains of recessions but since the earnings seem to be, I won't sweat the small stuff. I don't own McCormick yet, but I'm certainly putting it on my list of things to buy during the next market dip.

The stock has historically traded at a premium to both the overall market and its peers. I think that the consistency of earnings warrants such a valuation. It currently is not priced at a premium to the industry, but I believe that this oversight will be correct by Mr. Market over the next five year. The P/E expansion combined with a consistent 9% average increase to share earnings and the rising dividend leads me to the conclusion that MKC could provide patient, long-term investors with an average annual total return nearing 17% over the next five years.

My goal is not to try to time the market or pick the top or bottom for any individual stock. Rather, I hope to separate the wheat from the chaff, so to speak. I try to bring the best two or three companies in each industry to investor attention. None of us knows with certainty when the market will correct or head higher, or by how much. I also hope that all investors will complete additional due diligence on each stock considered before adding purchases to their portfolio to ensure that each holding is appropriate and suitable to each individual's needs.

Since the stock is not undervalued, I would recommend picking shares up on any dips of 5% or more. My preference is to sell put options instead of placing limit buy orders. My favorite at this time is the June put option with a strike price of $50 and a premium of about $1.85 (last trade as of this writing). I wouldn't get a 5% discount, but I'd have the stock if it dips. If it doesn't dip I'll end up with a return of 3.5% on my cash for 3.5 months waiting. Then I'll just try again. I'll be making an over 10% annualized return on my money while I wait to buy this quality stock.

For those who would like to learn more about selling puts to buy stocks, please consider reading another article in which I provide a detailed explanation of the process.

Source: Add Some Spice And A Rising Dividend To Your Portfolio With McCormick