Published November 16th, 2016 by Bob Ciura
Investors should think of McCormick & Company (MKC) as the king of spices. The company was created all the way back in 1889, when founder Willoughby M. McCormick and three young workers started making flavors and extracts in his cellar and selling them door-to-door.
The company entered spices in 1896, when it issued its first McCormick’s Cookbook, and acquired F.G. Spice Company of Philadelphia.
From there, the company built itself into the leading spices and seasonings company in the world. Today, McCormick sells its products in more than 140 countries and has 10,000 employees.
McCormick is a Dividend Aristocrat. The Dividend Aristocrats are a collection of 50 companies that have increased their dividends for at least 25 consecutive years.
You can see the entire list of Dividend Aristocrats here.
McCormick has increased its dividend for 30 years in a row.
McCormick manufactures, and distributes spices, seasoning mixes, and condiments. It operates in two segments:
- Consumer (61% of sales)
- Industrial (39% of sales)
McCormick has a large brand portfolio. Its products are spread out according to geographic region. For example, some of its flagship products for the domestic market include Lawrys, Stubb’s, and Club House.
The products based on international flavors include Ducros, Schwartz, Kamis, DaQiao, Aeroplane, Kohinoor, Zatarains, Thai Kitchen, and Simply Asia.
Source: 2015 Annual Report, page 14
Business conditions are quite strong for McCormick. Last year, total sales rose 1%, which does not seem too impressive.
But, the strong U.S. dollar weighed down McCormick’s growth in 2015. Excluding the effects of foreign exchange, sales increased 6% last year.
One of the most important catalysts for McCormick moving forward is growth in new markets. McCormick is seeing rapid growth abroad, particularly in the emerging markets like China.
Source: Barclays 2016 Global Consumer Staples Conference, page 7
Growth in the emerging markets is expected to outpace growth in developed markets. Countries like China and India have populations of 1 billion, plus rapid economic growth and expanding middle classes.
This should bode well for consumer goods companies, such as McCormick. For example, the company’s sales in China rose 9% last year.
Acquisitions will be a key component of McCormick’s growth strategy. Moving forward, management expects approximately 33% of future sales growth will be derived from acquisitions.
Last year, McCormick made three impactful acquisitions:
- Brand Aromatics: expanded McCormick’s lineup of savory products developed for industrial customers. Also includes an organic product portfolio, an emerging growth category.
- Drogheria and Alimentari: established a leading position for McCormick in Italy to boost its international operations.
- Stubb’s: enhances McCormick’s grip on grilling products, including premium barbecue sauce in the U.S.
Another way for the company to grow earnings-per-share will be cost cuts. McCormick has accelerated its cost savings program over the past few years.
Source: Barclays 2016 Global Consumer Staples Conference, page 33
McCormick realized $98 million of productivity gains last year alone, a new record and a 42% increase from the previous year.
Competitive Advantages & Recession Performance
The two major competitive advantages for McCormick are its global scale and brand strength.
McCormick is a dominant player in its industry. It takes the leadership position in the $10 billion global spices and seasonings industry. In fact, McCormick is four times the size of its next largest competitor.
McCormick has a high level of brand awareness among consumers and enjoys a strong reputation for quality. One can hardly walk through a grocery store without seeing a wall of McCormick’s spices and seasonings.
In order to retain its positive image with consumers, the company spends sufficient capital on research and development. Spending on R&D is critical to continue innovating and developing new flavors. McCormick has spent at least $60 million per year on R&D over the past three years.
Not only that, the company markets its products aggressively. Marketing spend rose 6% last year and is up 44% from 2010.
McCormick has a highly recession-resistant business model. If anything, one could argue the company actually benefits from recessions.
The reason for that is because, during recessions, people typically scale back their dining out budgets. They tend to eat more at home instead of going to restaurants.
This is how McCormick managed to grow earnings-per-share each year during the last recession. McCormick’s earnings-per-share through the Great Recession of 2007 to 2009 are shown below:
- 2007 earnings-per-share of $1.92 (new high)
- 2008 earnings-per-share of $2.14 (new high)
- 2009 earnings-per-share of $2.34 (new high)
- 2010 earnings-per-share of $2.65 (new high)
As you can see, McCormick & Company hit new earnings-per-share highs each year through the Great Recession.
Valuation & Expected Total Return
McCormick stock trades for a price-to-earnings ratio of 25. This is right on par with the S&P 500 Index, which also trades for a price-to-earnings ratio of 25.
This indicates McCormick stock is fairly valued. As a result, future returns will be generated by earnings-per-share growth and dividends.
Management of the company has a balanced capital allocation model. It effectively allocates capital between share repurchases and acquisitions to drive earnings-per-share growth, along with dividends.
Source: Barclays 2016 Global Consumer Staples Conference, page 40
Expected total returns could be comprised of the following:
- 4%-6% organic revenue growth
- 1% growth from acquisitions
- 1% margin expansion
- 2% share repurchases
- 2% dividend yield
Based on this, future total returns could reach 10%-12% per year.
McCormick has a highly profitable business model and a clear path for growth moving forward. The company returns a lot of cash to shareholders through dividends and share repurchases.
One disadvantage for McCormick stock is that it has a slightly below-average dividend yield. The S&P 500 average dividend yield exceeds McCormick’s dividend yield by about 20 basis points.
However, McCormick more than makes up for this with high dividend growth rates. It should easily continue its track record of high single-digit dividend growth each year.
The company’s fairly high valuation and lower dividend yield give it an average rank using The 8 Rules of Dividend Investing. McCormick is a hold at current prices.