McCormick & Company (MKC): Uninterrupted Dividends Since 1925 And A 30 Year Growth Streak by Simply Safe Dividend
McCormick & Company (MKC) has increased its dividend for 30 consecutive years and paid uninterrupted dividends since 1925.
While the stock’s current dividend yield is just 2%, it has recorded a double-digit total return over each of the last 1-, 5-, 10- and 20-year periods. Very few companies have managed to create such consistent value for shareholders.
We are evaluating this excellent business for potential inclusion in our Top 20 Dividend Stocks portfolio.
MCK manufactures and distributes spices, seasoning mixes, condiments, and other flavorful products to the entire food industry – retail outlets, food manufacturers, and foodservice businesses. The company was established in 1889 and incorporated in 1915. Some of MCK’s leading brands include McCormick, Lawry’s, Club House, Zatarain’s, Thai Kitchen, and Simply Asia.
MKC has two business segments – consumer (60% of sales, 80% of operating income) and industrial (40% of sales, 20% of operating income).
The consumer business sells spice, herb and regional favorite brands. The industrial business sells to nine of the top 10 global food and beverage companies and nine of the top 10 foodservice and restaurant chains. Its flavor solutions include snack seasonings, sandwich sauces, and branded foodservice products.
By geography, the U.S. is MKC’s largest market (55% of sales), followed by China (including joint ventures, 22% of MKC’s sales are from emerging markets). The company has brands in more than 135 countries around the world.
MKC’s business is driven by its strong portfolio of brands, continuous product innovation, marketing investments, and gradual expansion into new product categories and geographies with organic growth and acquisitions.
The company’s history dates back to the 19th century, building up over 100 years of customer recognition of its iconic brands. Today, MKC is four times the size of its next largest global competitor and approximately 60% of MKC’s consumer sales are from brands that have number one market share positions in their categories. The McCormick brand is also ranked fifth overall on the Digital IQ Index of 114 food brands.
To reinforce its dominant market position, MKC invests heavily in branding. The company spent over $225 million on brand marketing support costs (over 5% of sales) and $100 million on advertising (2.3% of sales) in 2014. Smaller players or new entrants have a hard time competing for mindshare with consumers because of the substantial investments MKC makes to maintain its brand image.
Beyond branding, MKC invests in product innovation to keep its lineup fresh and relevant. Many of its products are prepared from confidential formulas developed by its research laboratories and product development teams. MKC spent over $60 million on R&D in 2014 and has 18 innovation centers around the world.
As a result of its focus on innovation, approximately 8-10% of McCormick‘s annual sales are from products launched over the last three years. The company is also staying relevant with e-commerce distribution and was named supplier of the year for “Grocery” by Amazon.
Thanks to its strengths in branding and product innovation, many of MKC’s customer relationships have been active for decades. The company’s range of products is one of the broadest in the industry and also covers practically every price point, keeping MKC relevant regardless of the customer’s needs. Breaking up these relationships is no small feat for new entrants.
McCormick is also able to harness its global distribution network to efficiently leverage its acquisitions. Some of the major acquisitions MKC has made over the last 15 years include Stubb’s barbeque (2015), Lawry’s (2008), Simply Asia (2006), and Zatarain’s (2003). These deals provide MKC with new products and markets to continue the company’s growth.
With almost an endless number of flavor categories, MKC can continue building its global growth platforms through acquisitions over the years.
Altogether, McCormick targets long-term sales growth of 4-6%, including acquisitions, and earnings per share growth of 9-11% per year. The company has been remarkably consistent in achieving these goals throughout history, and we expect more of the same going forward.
McCormick & Company (MKC)’s Key Risks
From time to time, MKC’s business must put up with currency headwinds and raw material cost volatility (e.g. the price of agricultural products is impacted by weather and harvest conditions), but we don’t view these issues as threats to the company’s long term earnings power.
Issues that could structurally impact MKC’s future are changes in consumer tastes, increased competition from private label and smaller brands, a botched acquisition, or the loss of a large customer (Wal-Mart and Pepsi accounted for 22% of MKC’s 2014 sales).
Regarding consumer health trends, it’s no new news that organic, natural, and healthier products are taking more shelf space at almost every retailer. Consumers are reading more labels and want to know what exactly they are putting in their bodies.
McCormick seems to face less risk than other incumbents because spices and herbs are not generally perceived to be health concerns with consumers. If anything, they are viewed as good things to consume and can even serve as substitutes for sodium.
MKC is also investing to combat this risk and expects over 70% of McCormick brand spices, herbs, and extracts in the U.S. will be non-GMO. About 80% of its premium gourmet lines will be organic in 2016 as well.
The threat posed from lower-priced private label products and new brands is likely a bigger concern. MKC has demonstrated excellent pricing power over time, but this has also created a sizable gap in price between its spices and herbs and those sold under private labels. MKC does have its own private label line of products, but it is a small proportion of overall sales. Hopefully the company’s brand recognition and predictable flavor tastes are enough to hold market share against lower-priced options, but we will keep our eye on volume trends.
McCormick’s Dividend Analysis
We analyze 25+ years of dividend data and 10+ years of fundamental data to understand the safety and growth prospects of a dividend. McCormick‘s long-term dividend and fundamental data charts can all be seen by clicking here.
Dividend Safety Score
Our Safety Score answers the question, “Is the current dividend payment safe?” We look at factors such as current and historical EPS and FCF payout ratios, debt levels, free cash flow generation, industry cyclicality, ROIC trends, and more. Scores of 50 are average, 75 or higher is very good, and 25 or lower is considered weak.
McCormick‘s dividend is about as safe as they come with a Safety Score of 99. The company has paid dividends every year since 1925 and has many attractive characteristics, starting with its payout ratios.
As seen below, MKC’s earnings payout ratio has remained around 40% over the last decade, and its free cash flow payout ratio has hovered around a similar level. These are very healthy figures that provide MKC plenty of flexible to continue paying and growing its dividend over the years.
Source: Simply Safe Dividends
Source: Simply Safe Dividends
Beyond payout ratios, understanding how a