Looking to spice up your dividend portfolio? You might consider adding a dash of McCormick & Co.
As dividend stocks go, McCormick may not enjoy the same profile as, say, Johnson & Johnson or Procter & Gamble. But in the spice rack, it's the undisputed king.
With 2016 sales of $4.41-billion (U.S.), the Sparks, Md.-based company is the largest player in the global spice and seasonings industry. Its brands – which include McCormick, Clubhouse, Lawry's, Thai Kitchen and many others – are sold in 140 countries and command a 20-per-cent share of the consumer spice market, or about four times its next-biggest competitor. Complementing its retail business, McCormick sells its flavourings and seasonings to many of the world's largest food producers and restaurant chains.
The company is also at the forefront of innovation in an industry that is enjoying a tailwind from the growing popularity of regional cuisine and cooking in general.
"McCormick has been leading the industry by introducing new products, including … ethnic and organic spices. These new products tend to have higher growth rates and are also more profitable," Edward Jones analyst Brittany Weissman said in a note. McCormick also has a history of gobbling up competitors, and its "track record of integrating acquisitions is excellent in our view," Ms. Weissman said.
All of this has translated into steady growth for the 128-year-old company.
Over the past decade, McCormick's sales have grown at a compound annual rate of 5 per cent and earnings per share have risen at nearly 10 per cent. Management's goal is to grow sales by 4 per cent to 6 per cent and EPS by 9 per cent to 11 per cent annually over the long term.
For dividend investors, McCormick's growth has led to some tasty increases. The company has paid dividends since 1925 and has raised its dividend for 31 consecutive years – including a 9.3-per-cent increase announced in November. The stock's current yield of 1.9 per cent won't make you rich, but Ms. Weissman expects the dividend to rise by about 8 per cent annually over the next five years, supported by McCormick's growing earnings, strong balance sheet and solid A-minus credit rating from Standard & Poor's.
Even McCormick stumbles from time to time, however. On Tuesday, the company posted first-quarter adjusted earnings of 76 cents a share, topping expectations of 74 cents. But sales growth of 1 per cent – including a 2-per-cent drag from unfavourable currencies – came up short of analyst forecasts. McCormick said first-quarter results benefited from last year's acquisitions of the Gourmet Garden and Cajun Injector brands and from growth in China, offset by "weak U.S. food industry trends … and a challenging U.K. retail environment."
The stock, which had been up nearly 9 per cent this year, fell $2.93, or 2.9 per cent, to close at $98.43 on the New York Stock Exchange.
For prospective investors, a pullback in McCormick's share price would actually be a good thing. Even after Tuesday's drop, many analysts consider the stock's valuation to be a bit too spicy; it trades at about 24 times estimated 2017 earnings, compared with an average of about 21.5 for the food industry. Of the 14 analysts who follow the company, three rate McCormick a "buy," nine have a "hold" and two have a "sell," according to Thomson Reuters. The average 12-month price target is $98.25 – slightly below McCormick's current price.
Clearly, many analysts believe McCormick's shares have run up too far. I would agree. McCormick is a great company with an excellent track record of sales, earnings and dividend growth. But waiting for a better entry point would be a prudent move. In the low $90s or high $80s – where the stock bottomed late last year before rebounding – McCormick could start to look very appetizing indeed.