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McCormick Is Well-Positioned to Reward Shareholders

The company is recovering from recession woes

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Nov 24, 2021
Summary
  • McCormick failed to grow sales meaningfully last year as restaurants around the world saw reduced patronage.
  • The company is now recovering from these challenges.
  • McCormick has increased its annual dividend in each of the last 35 years, and this track record is likely to stay intact.
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McCormick & Company, Inc. (

MKC, Financial) is an American food company that manufactures, markets and distributes spices, seasoning mixes, condiments and other flavoring products to food manufacturers, retailers and foodservice businesses. The company operates in two segments:

  1. The consumer segment, which includes marketing and distribution of rice, spices, herbs and seasonings, as well as desserts. The company also sells its products under private labels to supermarkets, mass merchandise, warehouse clubs, drug stores and e-commerce retailers.
  2. The flavor solutions segment, which includes distribution of seasoning blends, spices and herbs, condiments, coating systems and compound flavors to food manufacturers and foodservice businesses.

The company's sales, distribution and production operations are based in North America, Europe and China, with additional locations in Australia, India, Central America, Thailand and South Africa.

The global leader in flavors and spices failed to grow sales meaningfully last year as restaurants around the world were shut down temporarily and saw reduced patronage due to Covid-19. However, there was an increased purchasing of McCormick products for at-home use, and McCormick's flavor solution sales have recovered significantly from their lows. The company has increased its dividend for 35 years in a row and seems well-positioned to reward shareholders handsomely in the foreseeable future as well.

Earnings recap

Demand for McCormick's packaged food and beverage products is picking up as restaurants are beginning to see more traffic, and this favorable macroeconomic development boosted the company’s third-quarter results. On Sept. 30, the company announced third-quarter earnings, with adjusted earnings of 80 cents per share, up 5.3% year-over-year. A

All regions saw substantial revenue growth, with sales up 8% year-over-year and up 17% compared to the corresponding quarter in 2019. Sales in the consumer segment increased by 1% while sales in the flavor solutions segment increased by 21%, showing strong base business growth as well as contributions from the FONA and Cholula acquisitions. Despite declining sales in 2020, McCormick acquired Cholula, a well-known spicy sauce company, in November 2020, and FONA, a prominent developer of clean and natural flavors, in December 2020.

For the third quarter of 2021, both at-home and away-from-home products contributed equally to revenue growth. The United Nations recently named McCormick as a global compact LEAD company for its continuous commitment to the Global Compact accord and adhering to its 10 principles for responsible business during the quarter. McCormick is one of only 37 companies in the world and the only American food company to be included on this list. This global recognition goes on to highlight the admirable business practices deployed by the company in its day-to-day business operations, which itself has turned out to be a competitive advantage for McCormick.

Outlook

On Sept. 29, the Board of Directors of McCormick declared a quarterly dividend of 34 cents per share, which paves the way for the 97th year of consecutive dividend payments by the company.

McCormick is enjoying competitive advantages due to its diverse product offerings and is focused on further strengthening its market position with strategic marketing, unique product innovations and using Artificial Intelligence tools designed by International Business Machines Corporation (

IBM, Financial) to develop new flavor experiences. The pandemic-induced changes in customer lifestyle choices are expected to continue in the post-pandemic era as well, and increased cooking from home is one of the changes that are likely to benefit McCormick in the coming quarter.

Although restaurants have started to reopen, customers' interest in cook-at-home and packaged food products are still at an elevated level, which should help the revenue growth of the company in the coming years. The company boosted its full-year guidance based on these expectations.

Investors, however, should keep an eye on the rising cost of goods owing to inflation, which continues to be the fundamental concern for the food business. Food prices have experienced some of the hightest inflation numbers in the market over the past year, so consumers may increasingly buy less and cheaper food, eschewing spices.

Takeaway

McCormick is recovering from recession woes, and the company seems well-positioned to deliver handsome returns to value and income-oriented investors in the long run, in my view. McCormick has a long track record of distributing income to shareholders via dividends, and there is no reason to think the company will fail to maintain this "slow but steady" track record in the foreseeable future.

Disclosures

I/we have no positions in any stocks mentioned, and have no plans to buy any new positions in the stocks mentioned within the next 72 hours. Click for the complete disclosure
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