The best consumer-oriented dividend growth stocks tend to have at least two things going their way: 1. Their brands are widely recognized; 2. Their products are frequently used by consumers. The seasonings and spices company, McCormick (MKC 0.23%), arguably fits this investment criteria.
But is that enough reason to buy the stock? What else should dividend growth investors be looking for and how does this top brand measure up overall?
Let's assess McCormick's fundamentals and valuation to see if there are answers to be found.
Brand excellence is powering growth
Everybody likes food, especially flavorful food. Often, consumers also like to add flavor to their food to excite their taste buds. When it comes to adding flavor, nobody has a brand portfolio of condiments, spices, and seasoning mixes that can match McCormick's. The company's best-known brands include Cattlemen's BBQ sauce, Frank's RedHot, French's mustard, and the eponymous McCormick herbs and spices.
| Metric | Q2 2022 | Q2 2023 |
|---|---|---|
| Constant currency sales growth rate (YOY) | Flat | 10% |
| Net margin | 8.4% | 9.8% |
Data source: McCormick. YOY = year over year.
McCormick's net sales surged 8% higher year over year to $1.6 billion in the fiscal second quarter of 2023 (ended May 31). And since the company faced a 2-percentage-point foreign currency translation headwind due to the robust U.S. dollar, constant currency sales growth was even more impressive for the quarter.
McCormick's healthy top-line growth was largely fueled by an 11% increase stemming from price hikes that were passed on to consumers. This was done to stay ahead of the rising costs of doing business. Because consumers like the company's brands so much, sales volume/mix held firm -- down just 1% over the year-ago period. In other words, these elevated prices had virtually no impact on consumption habits for McCormick's products.
The Maryland-based company recorded $0.60 in non-GAAP (adjusted) diluted earnings per share (EPS) during the fiscal second quarter, which equates to a 25% growth rate. As a result of disciplined cost management, McCormick's expenses grew at a much slower rate than its net sales. This is what led to an expansion in non-GAAP net margin, which explains how adjusted diluted EPS growth exceeded net sales growth in the period.
As inflation tapers further, McCormick should be able to continue its operating momentum: Analysts think the company's adjusted diluted EPS will rise by 7.4% annually over the next five years.
Image source: Getty Images.
The dividend growth streak shouldn't end anytime soon
With McCormick already boasting 37 straight years of dividend growth, it would be an understatement to argue that it is a great dividend growth stock. Better yet, the company shouldn't have difficulty in building on this track record.
This is because, aside from its solid earnings growth prospects, McCormick's dividend payout ratio is expected to clock in at less than 59% in the fiscal year ending this November. That should give the company enough funds to execute its growth ambitions, reduce debt, and repurchase shares while handing out high-single-digit dividend increases each year for the foreseeable future. Coupled with a 1.7% dividend yield that is slightly above the S&P 500 index's 1.5% yield, this makes McCormick attractive for both starting income and growth.
Hold off on buying (for now)
McCormick is a flourishing business. But even with its underperformance versus the broader market so far this year, the stock's valuation is less than appealing. McCormick's forward price-to-earnings (P/E) ratio of 31.7 is nearly double the packaged foods industry average forward P/E ratio of 16.
The stock certainly deserves a premium valuation. But with such a massive premium, investors may want to put McCormick on their stock shopping list and revisit it after a correction from the current $87 share price.
