Dividend Aristocrats Part 11 Of 52: McCormick & Company (MKC) by Sure Dividend

McCormick & Company (MKC) is a leading global provider of spices, seasonings, condiments, and flavors. The company was founded in 1889 and has increased its dividend payments for 28 consecutive years.

The company has assembled a large portfolio of high quality brands.  The image below shows many of the company’s easily recognizable spice and flavoring brands.

McCormick & Company

Source:  McCormick Brands

The spice and seasonings industry is especially appealing for long-term investors.  The industry changes very slowly.  After all, technology does not radically alter the spice and seasoning industry.

Competitive Advantage

McCormick & Company is about four times as large as its next largest competitor. The company has 22% market share in the global spices and seasonings industry.

Spices are commodity products.  Salt with a McCormick label on it is the same as salt with a different company’s label on it.  Despite this, McCormick has managed to generate operating margins over 15% for all of the last decade.  The company has successfully differentiated itself form its competitors.

The company’s primary competitive advantage comes from its well-known brands coupled with its industry leading size.  The image below shows the market position of many of the company’s leading brands:

McCormick & Company

Source:  McCormick Investor Relations

The company supports its brands with substantial advertising spending.  Total advertising spending over the last 3 full fiscal years is shown below:

  • 2012 advertising spending of $198 million
  • 2013 advertising spending of $208 million
  • 2014 advertising spending of $227 million

McCormick spends about 5% of its revenue a year on advertising.  This is a substantial advantage, but it is insurmountable when one considers that McCormick is about four times as large as its next largest competitor.

Total Return Analysis

McCormick & Company expects to generate total returns for shareholders of 11% to 13% a year going forward.

The company plans to do this by growing earnings-per-share at 9% to 11% a year and paying a ~2% dividend.

Over the last decade, McCormick & Company has compounded its earnings-per-share at 8.6% a year; below the minimum expected growth going forward.  To be fair, earnings-per-share growth of 8.6% a year is more-than-acceptable for a stable business such as McCormick.

Over the last decade, the company’s growth has come primarily from a mix of:

  • Sales growth at 5.6% a year
  • Net profit margin improvements at 2.1% a year (from 8.6% to 10.4%)

Share repurchases picked up substantially in 2014.  McCormick and Company reduced its share count by 2.2% in 2014.

For the company to hit its growth targets, it will have to continue growing sales at around 6% a year, while increasing margins by 2% a year and reducing its share count by 2% a year as well.

A better estimate of total returns going forward for McCormick & Company is as follows:

  • Sales growth of 4% to 6%
  • Share repurchases of 2%
  • Dividends of 2%
  • Margin Improvements of 1% to 2%

This comes to expected total returns of 9% to 12% going forward – 1.5 percentage points off from management’s expectations on average.

Growth Analysis

McCormick’s growth strategy is to:

  1. Build brand equity
  2. Accelerate innovation
  3. Expand through acquisitions

The company spends about 5% of revenue on brand building through advertising, as discussed in the competitive advantage section of this article.

McCormick spends around $60 million a year on research and development.  This is quite high for a company in such a slow changing industry.  McCormick uses this spending to continuously push out a broad array of new flavors, packaging, and other tweaks to its existing product portfolio.

The company is also upgrading the quality of its ingredients.  Within 1 year, 70% of the McCormick brand spices, herbs, and extracts will be Non-GMO.

McCormick has been very active lately with acquisitions.  In 2015 alone, the company has made 3 significant acquisitions:

The image below summarizes the company’s important acquisitions over the last several years:

McCormick & Company

Source:  McCormick Barclay’s Global Consumer Staples Presentation, slide 38

Recession Performance

When recessions hit, people tend to eat out less and cook more at home.

This trend benefits McCormick and allows the company to grow through recessions.  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)

As you can see, McCormick & Company hit new earnings-per-share highs each year through the Great Recession.  In fact, the company has grown earnings-per-share every year since at least 1999.

Valuation & Final Thoughts

McCormick & Company is a high quality business with a strong competitive advantage in a slow changing industry; exactly what long-term investors should look for.

Additionally, the company is committed to paying rising dividends and holding a 40% dividend payout ratio while continuing to repurchase shares; the company is very shareholder friendly.

Unfortunately, McCormick and company is not trading for a bargain.  The company currently has a price-to-earnings ratio of 23.9.  Over the last decade, McCormick’s price-to-earnings ratio has averaged about 18.5.  The company appears overvalued at current prices.

Despite being a bit overvalued, McCormick and Company still ranks slightly above average using The 8 Rules of Dividend Investing thanks to its extreme stability and solid total return potential.  The company is a hold at current prices.  If the price-to-earnings ratio dips near 18, the company will make a compelling purchase for long-term investors.