McCormick (MKC -1.26%) describes itself as a flavor company, which is fairly unique in the packaged food space. However, selling flavors has been a great place to be so far this year, and that positive trend is likely to continue.
Here's how investors should be thinking about this food giant, and why it is a solid reopening stock.
Highly focused brands
Like many of McCormick's peers, the company is really a brand manager, with iconic names like its namesake spices, French's mustard, and Frank's Red Hot filling out its roster. What sets the company apart is that it focuses on flavor enhancers. This unique positioning has led to years of steady growth, highlighted by more than three decades of annual dividend increases. The average annualized dividend increase over the past decade was roughly 9%, which is an impressive sum for a company in the generally slow-growth packaged food industry.
That said, 2020 was a very odd year thanks to the global coronavirus pandemic. McCormick's overall sales increased 5%, driven by 10% growth in its consumer segment. That's hardly shocking, given that social distancing had people spending more time at home, leading to more home-cooked meals. However, the company's flavor solutions business witnessed a 3% decline in sales. This group generally sells to institutional customers, including restaurants, many of which were shut down because of social distancing requirements.
Another year, more oddity
With 2021 half over at this point, the 2020 situation has basically started to reverse. To put a number on that, in the fiscal first-quarter consumer sales increased 35.4%, while flavor solutions saw a 4.3% increase, all of which was driven by an acquisition. However, second-quarter sales in the consumer division fell 1.8%, while the flavor solutions group saw growth of 39.5%, of which 9.2 percentage points was from the aforementioned acquisition.
What's going on? While it might at first seem like the consumer division has hit a wall, it is really just lapping very strong growth in 2020. In fact, it's actually quite impressive that sales only fell off 1.8%. Meanwhile, the flavor solutions segment is lapping a period that included the economic shutdown, leaving it with easy comparisons. Put the two divisions together, noting that the consumer division is the larger entity, and you get an overall sales advance of 11.1%.
So the bigger takeaway here is that the consumer division is really holding its own despite the reopening process, and the flavor solutions group is roaring back because of the reopening process. The first half was so strong, in fact, that McCormick increased its sales guidance from 8% to 10% growth to 11% to 13%. Adjusted earnings per share guidance, meanwhile, has been increased by three cents on both the high and low ends, and now suggest 6% to 8% growth in 2021. This trend likely has a few more quarters to go before things start to even out again.
In all fairness, McCormick is facing the same inflation headwinds as other food makers, so operating costs have been an issue. That's part of the reason why sales growth is expected to outstrip adjusted earnings growth. But the food maker is working to save money where it can and pass as much of its costs along to customers as possible. So eventually it will deal with the inflationary pressures. But even with this headwind, the reopening of restaurants and other places where people eat away from home should remain a huge tailwind here, making this a solid reopening stock.
McCormick's dividend yield is around 1.6% today. That's toward the low end of its historical range, but notably higher than the roughly 1.2% it reached earlier in 2021. Investors have been selling off food makers, with the expectation that consumers' buying habits will turn into a headwind. While that may be true for a lot of companies, the tailwind from McCormick's flavor solutions group is more than making up for the relatively modest drop on the consumer side. If you own the stock, the numbers suggest that there's no need to worry here.
If you don't own the stock, it's a bit pricey today, but worth putting on your wishlist just in case Wall Street continues to misjudge the underlying and still-favorable trends. Indeed, if the yield gets above 1.8% it is probably worth reconsidering the stock. At 2% the dividend yield would suggest a solid long-term buying opportunity. And if the yield hits 3%, which isn't particularly likely outside of a major bear market, you might want to back up the truck.