Updated March 24, 2021 by Bob Ciura
To become a dividend aristocrat, a company must have a strong brand and a dominant industry position. The Dividend Aristocrats are a group of 65 companies in the S&P 500 Index with more than 25 consecutive years of dividend increases.
You can download an Excel spreadsheet with the full list of Dividend Aristocrats from the link below:
A perfect example of a dividend aristocrat with an industry leading brand is consumer goods company McCormick & Company (MKC). McCormick has paid dividends every year since 1925 and has increased his dividend for 35 consecutive years.
The growth in dividend growth is due to the high quality business. McCormick is a global leader in spices, condiments and flavors. It has expanded its leadership position organically and through acquisitions. This has driven McCormick’s dividend growth for many years and will continue to do so for years to come.
McCormick was founded in 1889 when founder Willoughby M. McCormick started making flavors and extracts in his basement which he then sold door to door. At first, the business grew gradually. In 1896, McCormick entered spices by publishing his first McCormick cookbook. Over time, the company has steadily developed into the world’s leading company for spices and spices.
McCormick & Company manufactures, markets, and sells mixed spices, condiments, condiments, and other products to customers in the food industry. The most important brands include McCormick, Lawrys, Stubb’s, Club House, Ducros, Schwartz, Kamis, Kohinoor, Zatarains, Thai Kitchen and Simply Asia.
It has a market cap of $ 23 billion, which makes it a large-cap stock. McCormick released fourth quarter and full year results on 1/28/21. Revenue for the quarter rose 4.9% to $ 1.56 billion, just above estimates. Adjusted earnings per share fell 1.9% to $ 0.79 for the quarter.
The company’s core consumer segment led the way in the fourth quarter.
Source: Investor Presentation
For the year, revenue increased 5% to $ 5.6 billion and adjusted earnings per share increased 6% to $ 2.83. Consumer sales rose 5.9% overall, driven by a 3.7% improvement in volume and mix, a 1% price contribution and a cheap currency exchange of 1.2%.
Sales in the US increased 5.5% mainly due to volume and mix. This region saw increased demand across the portfolio, including the strength of Franks RedHot, Frenchs Senf, Simply Asia and Zatarains. E-commerce sales increased 136%.
McCormick resulted in adjusted earnings per share of $ 2.91 to $ 2.96 for fiscal 2021, a growth of ~ 4% mid-forecast.
In the future, McCormick has plenty of room for further growth due to the growth in the emerging markets and also the acquisitions. First, international growth is a powerful catalyst for McCormick. In the fourth quarter of 2020, Europe / Middle East / Africa was the company’s best geographical segment with constant sales growth of 5.2% in currencies.
Higher demand for herbs and spices as well as higher prices also contributed to sales growth in the region. Regardless, acquisitions are an integral part of McCormick’s growth strategy.
In 2018, McCormick acquired Franks RedHot and French’s in a $ 4.2 billion purchase from RB Foods, the grocery division of consumer goods giant Reckitt Benckiser (RGBLY). This was the largest deal in McCormick’s history and is already a growth driver for the company.
McCormick has used his industry leadership to rapidly grow these top brands around the world. Frank’s RedHot is the leading hot sauce brand in the United States, while French’s leads the mustard category. The common theme of McCormick’s M&A strategy is to find top brands that lead their respective categories and are easily scalable.
This theme is once again made clear by the recent acquisitions of Cholula Hot Sauce and FONA International. First, in November 2020, McCormick acquired Cholula, the premium Mexican hot sauce brand, for $ 800 million. This acquisition fits perfectly with McCormick’s strategy of acquiring the highest quality brands and rapidly scaling them.
Source: Investor Presentation
McCormick followed suit in December 2020 with the acquisition of FONA International, a leading manufacturer of clean and natural flavors with customers in the food, beverage and nutrition markets. McCormick acquired FONA International for $ 710 million in cash.
We anticipate that the company’s various acquisitions, combined with its own strong brands, will result in strong earnings per share growth going forward. We estimate McCormick can achieve 8% annual earnings growth through fiscal 2026.
Competitive advantage and recession performance
The two most important competitive advantages for McCormick are brand strength and global size. McCormick is the top brand in the global spice and seasoning industry, and is expected to grow over the next five years.
This gives McCormick leverage over retailers and pricing power. These characteristics help the company produce consistent profits every year, even when the economy slips into recession.
McCormick was able to increase earnings per share every year during the last recession. Earnings per share during the Great Recession are shown below:
- 2007 earnings per share of $ 1.92
- 2008 earnings per share of $ 2.14, up 11%
- 2009 earnings per share of $ 2.34, up 9.3%
- 2010 earnings per share of $ 2.65 (up 13%)
As you can see, McCormick & Company has increased earnings per share every year through the great recession. Additionally, the company had average double-digit annual growth each year, which was very impressive and a very rare accomplishment even for a dividend aristocrat.
Valuation and expected return
At mid-full year guidance, McCormick expects adjusted earnings per share this year to be approximately $ 2.94. As a result, the stock is trading at a price-to-earnings-ratio of 29.6. This is above our price-performance ratio at the fair value of ~ 21.
McCormick’s valuation multiple has increased significantly in recent years as the company posted strong earnings growth. Still, the stock appears to be significantly overvalued. If the stock returned to our target P / E ratio by 2026, the valuation over that period would be a -6.6% headwind against annual return.
Fortunately, shareholder returns are derived from expected earnings growth and dividends. Unless the economy is in recession, the company should be able to easily achieve at least 8% earnings growth in the future. The company’s strong brand and numerous catalysts for future growth should also lead to higher growth.
A possible breakdown of the expected returns is given below:
- Earnings per share grow 8%
- 1.6% dividend yield
- -6.6% valuation reversal
Overall, we believe investors can expect total annual returns of just 3% through 2026. The high valuation limits our expected total return. With such a low expected return on McCormick, we are currently evaluating the stock as a sale.
Still, McCormick is a high-growth dividend stock. The company has increased its dividend by ~ 9% annually over the past 10 years. The company recently increased its quarterly dividend by ~ 10% in November 2020 despite the coronavirus pandemic weighing heavily on the US economy.
McCormick has a healthy payout ratio of 46% based on expected adjusted earnings per share for fiscal 2021. This means McCormick should continue his annual dividend increases for many years to come.
McCormick dominates the condiments and condiments category. Its strong brands offer the company high profit margins and growth opportunities in both the US and international markets.
Income investors can be shut off with McCormick’s 1.5% dividend yield. McCormick has a very strong dividend growth history, however. It should be able to raise the dividend at a high single-digit annual rate each year.
That being said, the stock is currently not a buy. It has a premium valuation multiplier, and while it could be argued that a good quality company like McCormick deserves a higher stock valuation, we have a low expected return.
However, we would buy McCormick on a significant drop in its share price, resulting in a lower valuation and a higher dividend yield.
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