In part 11 of the 54-part series on Dividend Aristocrats, I will examine McCormick & Company (MKC, Financial). McCormick is a leading global provider of spices, seasonings, condiments, and flavors. The company sells its products to both consumer and commercial businesses. McCormick has been in business for 125 years; the company was founded in 1889. McCormick sells its spices under a wide variety of brands. The company is a dividend aristocrat and has increased its dividend payments for 28 consecutive years.
Business Overview
McCormick & Company divides its operations into two business units: consumer business and industrial business. The consumer business had an operating margin of 19% for full year 2013, while the industrial business had an operating margin of 8%. The consumer business generates nearly 80% of the company’s operating margin, and more than 60% of its revenue. The consumer business sells easily recognized consumer brands including Zatarain’s, Billy Bee, and Simply Asia.
Competitive Advantage
McCormick has a competitive advantage in its consumer business unit. The consumer business unit realizes fairly high operating margins near 20%. Its competitive advantage comes from the company’s strong brands which have resulted in global leading market share in herbs and spices.
The company has become the largest retailer of herbs and spices throughout the world thanks to its flagship McCormick brand. The company is much more than just McCormick’s spices, however. McCormick is number one in the U.S. in a variety of categories including Hispanic spices (a quickly growing food segment) and Thai Cuisine.
McCormick supports its brand equity through customer engagement and advertising spending. The company has an excellent marketing branch that delivers ROI well in excess of food industry averages. McCormick’s competitive advantage is a result of years of advertising spending and accumulated trust from brands that have been around for more than 100 years.
Growth Prospects
McCormick & Company expects long-term sales growth of between 4% and 6% a year. The company expects to grow earnings per share at a more robust 9% to 11% a year. The higher earnings per share growth as compared to sales growth will come from increases in operating and net profit margin, and share repurchases.
Demand for both herbs/spices and recipe mixes has been growing consistently throughout the world over the last five years. The trend is expected to continue over the next several years. Emerging markets, in particular, are expected to see strong demand growth for both herbs/spices and recipe mixes of more than 10% over the next five years.
As a result of favorable macroeconomic trends in the developing world, McCormick is rapidly growing sales in emerging markets. Emerging markets accounted for 15% of sales in full 2013, versus just 10% in 2011. McCormick has a long growth runway ahead in the developing world. The company has proven it can adjust its message to appeal to consumers in this region, as it has shown through recent growth in emerging markets.
In addition to growth in emerging markets and organic growth through advertising, McCormick has grown its revenue and earnings through strategic acquisitions. In 2013, McCormick acquired Chinese bullion maker Wuhan Asia-Pacific Condiments Company to strengthen its position in the China. McCormick paid $147 million for the company, which generated $122 million in sales in its last fiscal year before being acquired. McCormick management expects the acquisition to be accretive to earnings in 2014. More importantly, the acquisition enhances the company’s competitive position in the important Chinese market. Other notable acquisitions for McCormick include Lawry’s in 2008, Billy Bee (#1 Canadian honey brand) in 2009, and Kitchen Basics in 2011.
Dividend & Shareholder Return Analysis
As mentioned earlier in the article, McCormick’s management is expecting long-term EPS growth of 9% to 11%. The company has announced it plans to target a payout ratio of 40%. The company currently has a payout ratio of 46.5%, which is slightly above its target ratio. Shareholders of McCormick should expect dividend growth in high single digits, and possibly low double digits over the next several years. The company currently has a dividend yield of 2.16% which is slightly above the dividend yield of the S&P500.
Recession Performance
McCormick performs well during recessions. During the Great Recession of 2007 to 2009, the company grew earnings per share each year. McCormick’s performance is enhanced by recessions as consumers tend to eat out less during times of economic hardship in order to save money. McCormick benefits when consumers prepare foods at home as the bulk of the company’s revenue and earnings comes from spices, cooking mixes, and other at-home ingredients for cooking.
Valuation
McCormick is currently trading near the top of its historical P/E ratio due to the relatively overvalued condition of the stock market. The company’s P/E ratio sits at about 23. Historically, the company has traded around a P/E ratio range of between 17 and 22. I believe McCormick is slightly overvalued at this time, but not severely overvalued. Despite its slight premium to historical prices, the company still makes a solid long-term investment due to its safety and growth prospects.
Final Thoughts
McCormick & Company is a Top 20 dividend growth stock based on the 8 Rules of Dividend Investing. The company ranks highly due to its exceptionally low price standard deviation of 19%, which is the 11th lowest out of 132 businesses with 25+ years of dividend payments without a reduction.
McCormick’s industry-leading status in the extremely slow changing herbs and spices industry leaves little doubt about the company’s viability. McCormick’s long-term growth prospects are bright, and it is well managed. The reason the company does not rank in the Top 10 is because it is somewhat overvalued at this time. With that said, it still makes an excellent position for long-term dividend growth investors.
