Picking leading companies with decades of rewarding shareholders tends to work well for dividend growth investors. That's because only the best businesses in the world can hand out dividend hikes year after year.
McCormick (MKC -0.38%), the dominant U.S. maker of spices and seasonings, has done just that -- with 37 consecutive years of dividend growth under its belt. But does that make it a buy today?
Let's take a deeper look at McCormick's fundamentals and valuation to make an assessment.
McCormick's brands provide flavor to the world
Everybody needs to eat. But sometimes food is lacking in flavor. This is where McCormick's brands of spices, condiments, and seasoning mixes can come in to fill the void for consumers. The company's portfolio of best-selling brands have something for everyone's taste preferences, such as Cholula Hot Sauce, Frank's RedHot Sauce, and Simply Asia.
McCormick recorded $1.6 billion in net sales during the first quarter ended Feb. 28, which was up 2.8% over the year-ago period. This isn't gangbusters growth, but this low-single-digit top-line growth doesn't tell the full story. That's because the combination of a global sales presence and an unusually robust U.S. dollar contributed to a 2.5% net sales headwind for the quarter. Factoring this variable out of McCormick's results, net sales grew at a mid-single-digit clip in the quarter.
Drilling down deeper, the company's price increases -- in order to keep pace with inflation -- chipped in 11% growth to net sales. Because consumers generally use McCormick's products on a regular basis, these higher prices were met with minimal resistance. Sales volume fell just 3% for the quarter. And that's despite other challenges, including a 2% volume decline in its Kitchen Basics broth brand, reduced consumption in China due to pandemic lockdowns, and withdrawal from Russia.
McCormick's non-GAAP (adjusted) diluted earnings per share (EPS) fell 6.3% year over year to $0.59 in the first quarter. Faster growth in cost of goods sold (4.2%) than in net sales led to a 90 basis point decline in non-GAAP net margin to 10.2% for the quarter. A marginal decline in the company's diluted share count couldn't offset lower profitability. This is why adjusted diluted EPS growth lagged net sales growth during the quarter.
Image source: Getty Images.
A sustainable, market-beating dividend
McCormick's 1.9% dividend yield is slightly above the S&P 500 index's 1.7% yield. And if that wasn't enough, the company's market-topping payout comes with a reputation for solid growth. McCormick's quarterly dividend per share has grown over 129% in the last 10 years.
MKC Dividend data by YCharts
And with the company's dividend payout ratio set to come in at 60% for the fiscal year that will conclude in November, future dividend growth is almost a foregone conclusion. This is because such a payout ratio leaves McCormick with the capital necessary to grow the business and repay debt.
The valuation is better, but not yet appetizing
Shares of McCormick have dropped 16% over the last 12 months, which makes it more attractive than it was not long ago. The stock deserves a premium valuation over its peers in the packaged foods industry considering its balance between being a consumer-oriented and commercially-oriented business.
But with its forward price-to-earnings (P/E) ratio of 28.6 clocking in at nearly twice the packaged foods industry average forward P/E ratio of 16.8, the premium is currently excessive in my opinion. That's why I believe McCormick is a fair buy around $70 as opposed to its current $81 share price.
