For a dividend growth investor, success can best be attained by following a simple investment philosophy: Buy companies with strong brands and reputations of prioritizing shareholders.
With 37 straight years of dividend growth, McCormick (MKC 0.59%) exhibits just the kind of shareholder-friendly culture that dividend growth investors should appreciate. But is the planet's largest spice and seasoning products manufacturer a buy? Let's check into McCormick's fundamentals and valuation to find out.
McCormick's brand portfolio is filled with star power
Food is essential to sustaining life for humans around the world. But for most consumers, food could always use more flavor. McCormick's products add distinctive flavors that enhance every meal. These brands include the eponymous McCormick spices and seasoning mixes, Lawry's BBQ sauce, and French's yellow mustard, which are found in many homes throughout the globe.
McCormick's sales declined 2% year over year to $1.7 billion in its fourth quarter ended Nov. 30, 2022. What was behind the decrease in the top line?
Due to inflation in raw ingredient costs, the company passed 9% price hikes onto consumers during the fourth quarter. Stemming from the divestiture of McCormick's prepared broth brand known as Kitchen Basics, volume dropped 3% for the quarter. Pandemic-related restrictions in China, the sale of a low-profit-margin business in India, and the exit from the consumer business in Russia led to a 4% decline in McCormick's other volume and product mix in the quarter.
Because the company is a global business with sales in 170 countries, McCormick has a lot of exposure to foreign currency translation. And with the U.S. dollar's strength in recent months, the company faced a 4% unfavorable foreign currency translation headwind during the quarter. These factors resulted in the sales decline for the quarter.
McCormick's non-GAAP (adjusted) diluted earnings per share (EPS) fell 13.1% over the year-ago period to $0.73 in the fourth quarter. The company's cost of goods sold increased at a faster rate than sales (4.3%), which caused non-GAAP net margin to tumble 150 basis points year over year to 11.6% during the quarter. This explains how the drop-off in McCormick's adjusted diluted EPS was greater than the sales dip for the quarter.
Image source: Getty Images.
A safe and market-topping dividend
McCormick's 2.1% dividend yield is meaningfully higher than the S&P 500 index's 1.6% yield. And the company appears poised to extend its dividend growth streak in the years ahead.
McCormick's dividend payout ratio is positioned to come in just less than 60% for the current fiscal year set to end in November. Such a payout ratio allows the company to retain the funds needed to complete bolt-on acquisitions to further strengthen its brand portfolio and pay down debt. This is why I would be shocked to see dividend growth come in below mid- to high-single-digits annually over the next few years.
The valuation is improving, but not quite there yet
Even after a steep drop from its 52-week high, McCormick isn't a screaming buy.
The stock trades at a forward price-to-earnings (P/E) ratio of 25.9, which is significantly above the packaged foods industry average forward P/E ratio of 17.1. While McCormick has certainly earned a premium valuation, this appears to be too rich of a premium to its peers.
And at the current $75 share price, McCormick is still valued at a trailing-12-month (TTM) price-to-sales (P/S) ratio of 3.2. For context, that is still moderately above its 10-year median TTM P/S ratio of 2.8. As a result, I am waiting for a sub-$70 share price before I will consider opening a position in McCormick stock.
