There is much to like about McCormick & Co. Inc. (MKC, Financial), and it is worth checking it now while it is on sale.
The share price appears to be rebounding, the company has increased its dividend for 37 consecutive years, including this year, and has reduced costs with a continuous improvement initiative since 2009.
You might also like the fact it is a consumer defensive stock, the kind that gets through bad economic weather without getting its feet soaked.
About McCormick
Based in Hunt Valley, Maryland, McCormick has a $23.17 billion market cap and had trailing 12-month revenue of $6.38 billion.
In its 10-K for the fiscal year that ended on Nov. 30, 2021, it called itself a global leader in flavor:
“We manufacture, market and distribute spices, seasoning mixes, condiments and other flavorful products to the entire food industry–retailers, food manufacturers and foodservice businesses. We also are partners in a number of joint ventures that are involved in the manufacture and sale of flavorful products, the most significant of which is McCormick de Mexico. Our major sales, distribution and production facilities are located in North America, Europe and China. Additional facilities are based in Australia, Central America, Thailand and South Africa.”
It operates in two business segments. The consumer segment sells dozens of brands of flavoring to multiple types of retailers, the biggest of which is Walmart (WMT, Financial), which represented 11% of consolidated sales in 2021. It sells brand name products such as McCormick, French’s and Frank’s RedHot in 160 countries.
The flavor solutions segment sells to multinational food manufacturers and foodservice companies. For these customers, the company supplies customized flavor solutions.
In recent years, it has faced several geopolitical issues and has tailored responses to meet them, as shown in this slide from a June 14 investor presentation:
The company’s Comprehensive Continuous Improvement initiative is its primary tool to offset some of the cost increases over the past two years.
Competition
Both segments operate in highly competitive markets. McCormick reports it builds brand recognition and loyalty in the consumer segment through advertising and promotions.
For flavor solutions, the company said it is differentiated by “our culinary and consumer inspired flavor development.” Customers in this segment tend to work with the company for the long term.
McCormick’s performance has been good, especially when compared with First Trust Nasdaq Food & Beverage ETF (FTXG, Financial); however, it has not kept up with the S&P 500 (SPY, Financial).
Financial strength
McCormick has carried a lot of debt in recent years.
The debt reflects the company’s acquisitions over the past five years. In 2017, it bought Reckitt Benckiser's (LSE:RKT, Financial) Food Division for $4.2 billion. In November 2020, it bought the parent company of Cholula Hot Sauce for $801 million and in December 2020, it purchased FONA International for $708 million.
Those acquisitions were part of the reason McCormick’s annual revenue jumped 43% in five years, from $4.41 billion in 2016 to $6.31 billion in 2021.
The deals also made it more expensive to service the debt, from $56 million in 2016 to $137 million in 2021. At the same time, it increased its ability to cover the interest. In fiscal 2016, it had an operating income of $657 million; five years later, in fiscal 2021, it generated operating income of $1.09 billion, an increase of $434 million.
Profitability
McCormick has industry-leading operating and net margins, at 14.78% and 10.86% respectively. However, they have lost their upward moment over the past several years.
Still, the company has been profitable for each of the last 10 years. And its returns on equity and assets beat the consumer packaged goods industry averages by significant margins.
Growth
Revenue has grown consistently over the past decade, at an average of nearly 5% per year.
That is roughly paralleled by the Ebitda growth rate, which comes in slightly higher at an average of 7.65% per year over the past decade.
Earnings per share without non-recurring items has also grown, albeit not so smoothly. Most importantly, though, it has grown even faster than revenue and Ebitda at an average of 8.82% per year. That indicates the company has become more efficient, and in part reflects its ability to reduce costs through its continuous improvement initiative.
Free cash flow was on the same track until 2021, when it took a dive.
The company explained in its annual report, “In 2021, the reduction in operating cash flow was the result of increased inventory levels to protect against supply disruption, employee incentive payments, and the payment of transaction and integration costs related to our recent acquisitions.”
So, there is nothing concerning in that decline of free cash flow.
Dividends and share repurchases
First on the agenda: McCormick is a Dividend Aristocrat, as it is an S&P 500 stock and has increased its dividend every year for 37 years.
That not only makes it a good dividend stock, but also a powerful company. Few companies can keep pushing up the dividend every year for at least 25 years. McCormick is a member of that elite group, and more than halfway beyond that to becoming a Dividend King (50 consecutive years).
As the table above shows, the current yield is 1.71%, which is close to the S&P 500 average of 1.87%. As for increases, the growth range has been between 9.4% and 9.10% over the past 10 years.
The dividend payout ratio is reasonable, leaving room for higher dividends.
Turning to share repurchases, there have been none for the past five years—it appears the company also used shares in its acquisitions.
Valuation
The company’s shares have traded below their 10-year average since last May, but appear to have rebounded in recent weeks.
The chart suggests McCormick may revert to the mean, its 10-year average. The GF Value Line, which is based on historical multiples, a GuruFocus adjustment factor and estimates of its future performance, sees a modest margin of safety.
Other valuation metrics, including the price-earnings ratio, the PEG ratio and discounted cash flow calculations, indicate the company is overvalued.
Despite these latter metrics, I would argue the company is currently selling at a discount.
Gurus
Six gurus own McCormick stock, but none hold very much. Ray Dalio (Trades, Portfolio)'s Bridgewater Associates had 48,913 shares at the end of the third quarter. That represented just 0.02% of the company’s shares outstanding and 0.02% of the firm's assets under management.
Tom Russo (Trades, Portfolio) of Gardner Russo & Quinn owned 45,150 shares and Joel Greenblatt (Trades, Portfolio) of Gotham Asset Management held 23,590 shares.
Institutional investors own 77.74% of shares outstanding, while insiders own 0.11%. Director Margaret M.V. Preston had the largest insider stake with 12,708 shares as of July 25.
Conclusion
McCormick’s dividend yield is not high, but it is near the S&P 500 average and has been growing at 9% per year or more for the past decade. That is lots of protection from inflation, barring any sudden resurgence.
This also may be an opportunity for capital gains from a company that has solid fundamentals.
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