Summary
-McCormick (MKC) is a high profit margin, aggressively growing spice company. This makes it a very attractive company compared to others in the food industry.
-Revenue Growth: Annualized 5.5% revenue growth over the past 3 years.
-Earnings Growth: Annualized 14% earnings growth over the past 3 years.
-Dividend Growth: Annualized 11% dividend growth over the past 3 years.
-Cash Flow Growth: A significant 12% cash flow growth over the same three year time period.
-Current dividend yield is a respectable 2.8%, and they’ve been increasing dividends for decades now.
-Conclusion: A good conservative pick for a portfolio as long as it remains below or dips under $40.
-Dividend Monk Rating: B+
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Overview
McCormick and Company is a 120 year old spice business. They produce and sell spices, herbs, and seasonings the world-over to both individual buyers and businesses. In January 2010, McCormick was named to the “Best 100 Companies to Work For” list.
They continually innovate with new products- one of their most interesting new products is “Perfect Pinch”, which comes as a set of small amounts of various spices so that consumers can try out new spices and increase their selection of McCormick products.
A full 38% of McCormick sales are outside of the United States.
Revenue, Earnings, and Cash Flow
Earnings from 2009 were $299.8 billion, which is nearly an 18% rise over 2008. Revenue has been growing as well, albeit not as quickly. When I look for an investment, revenue growth is of significant importance, because it shows that long-term growth is sustainable due to actual business expansion as opposed to pure efficiency improvement, which eventually becomes maximized. Compared to other companies in the food industry like Kraft or Kellogg that have seen declining revenue, McCormick has remained positive.
Revenue Growth
| Year | Revenue |
|---|---|
| 2009 | $3.192 billion |
| 2008 | $3.176 billion |
| 2007 | $2.916 billion |
| 2006 | $2.716 billion |
From 2006 to 2009, that’s an annual revenue growth rate of 5.5%, which was partially affected by poor currency exchange rates.
Earnings Growth
| Year | Earnings |
|---|---|
| 2009 | $299.8 million |
| 2008 | $255.8 million |
| 2007 | $230.1 million |
| 2006 | $202.2 million |
From 2006 to 2009, that’s an annual earnings growth rate of 14%. This is especially noteworthy considering that the company faced an unprecedented high cost of raw food materials and the current economic crisis which affected their industrial segment.
Cash Flow Growth
| Year | Cash Flow |
|---|---|
| 2009 | $415.8 million |
| 2008 | $314.6 million |
| 2007 | $224.5 million |
| 2006 | $310.8 million |
That’s an annual cash flow growth rate of 12%. Their low cash flow in 2007 was due to a $51 million increase in receivables.
Return on Equity is a solid 22.5%, and debt levels are moderate, so this metric is legitimately useful.
Dividends
As a dividend growth investor, I of course take a look at dividend growth.
Dividend Growth
| Year | Dividend | Yield |
|---|---|---|
| 2009 | $0.98 | 3.16% |
| 2008 | $0.90 | 2.65% |
| 2007 | $0.82 | 2.16% |
| 2006 | $0.74 | 2.39% |
| 2005 | $0.66 | 1.73% |
| 2004 | $0.58 | 1.93% |
Dividends increased at an annualized rate of 11%. The yield going into 2010 is about 2.80%, the highest it’s been in at least five years besides during the extreme market bottom of early 2009.
Payout ratio is a conservative 41%, the yield is reasonable, and the dividend growth is above average.
Balance Sheet
MKC’s balance sheet is strong. With $3.388 billion in total assets and $2.053 billion in total liabilities, MKC is appropriately and safely leveraged. The current ratio is 1.2 and LT debt to equity is a reasonable yet moderately high 0.66. Much of this is due to their recent company record-breaking acquisition of Lawry’s, but they are paying down their debt nicely. Total assets increased and total liabilities simultaneously decreased for 2009 compared to 2008.
Investing Thesis
Developed countries are becoming increasingly health aware, and due to this, people will be looking for healthy yet flavorful foods more than in the past. Spices are a great way to add taste to food while keeping the dish healthy overall. As the “new normal” consists of heightened savings across the US especially, people will be cooking at home more. McCormick, the leading spice company in the world, is aware of this trend and is well-positioned to take advantage of it.
The company is also aggressively expanding into China and India, and has also recently completed its largest acquisition in company history. Asia currently accounts for only 6% of McCormick revenue, so there is a tremendous growth opportunity there and they are very keen on tapping into it. In the past year, McCormick increased their Asia/Pacific regional sales by 23.5%.
Perhaps the best thing about this company is its operating profit margin. The great part about food companies is their reliability and simplicity, while the worst part is their low operating margins. Food companies naturally have low profit margins and are vulnerable to changes in raw food supply costs. McCormick, being a spice company, sells comparatively expensive but low quantity/volume products which gives them a superb operating margin of 14.6%. So with McCormick, you get the strengths of a food company without the downside. Their pricing power is unrivaled in the sector, especially in the individual consumer segment, as consumers buy small quantities of spices and generally won’t notice even substantial price changes on these sorts of products.
Risks
Like any company, McCormick has risks. McCormick is a large global company and is subject to international political and currency risks. The whole food industry including McCormick is facing very high cost of goods, and this may be a substantial trend. Luckily, McCormick has a very high operating margin and so is well insulated. Still, this will affect total profitability. Going forward, McCormick plans to use acquisitions as 1/3rd of their growth strategy, and there is risk that this might not pay off. With food, however, acquisitions tend to make more sense than with some other sectors. With their acquisition of Lawry’s, they had to change some equipment to larger batch manufacturing systems to integrate their product lines. Overall, being a recession-resistant and appropriately leveraged company, McCormick is quite a low risk investment.
Conclusion and Valuation
McCormick offers potential shareholders a relatively low risk, solid-growth, dividend stock opportunity, and would make a great core holding for a portfolio. It is undervalued compared to both its normal P/E ratio and dividend yield for the past 5 years.
Over the past several years, McCormick has simultaneously increased revenue, earnings, cash flow, and assets, reduced debt, expanded into new markets, completed successful acquisitions, and improved operating margins substantially.
Based on its stability and room for growth, the excellent earnings growth and the solid dividend yield, I think the stock is attractively valued as long as the P/E doesn’t exceed 17. That puts a price at $40 per share, and anything under that looks like a good buy for the long term.
Let me know what you think of MKC below in the comment section.
Full Disclosure: None
You can see my full list of individual holdings here.
Further Reading:
National Presto (NPK) Dividend Stock Analysis
Becton Dickinson (BDX) Dividend Stock Analysis
8 Reasons to go with Dividends
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