When a company I own is the leader in its industry by a significant margin, it gives me comfort as an investor.
I want the most recognizable brand name. I want the widest moat. I always want to feel like I own the best of breed.
Given all that, I’m happy to say this: Welcome to the Income Builder Portfolio, McCormick & Co. (MKC)! (I’m also welcoming it to my personal portfolio; more on that later.)
On Tuesday, May 29, I executed a purchase order for 10 shares of the world’s leading spice-maker at $103.13 each.
Including the $4.95 brokerage commission, the total paid was $1,036.25.
Daily Trade Alert provides $2,000 monthly for two IBP purchases. And because our May 4 buy of Lockheed Martin (LMT) only came to $939.60, it left us with a little extra cash to spend on MKC.
Divvies Are Delish!
Another wonderful reason: It is a Dividend Aristocrat, with 32 consecutive years of increasing its distribution to shareholders.
For 2018, MKC raised its quarterly payout 10.6% to 52 cents per share. So come July, the company will pay the IBP $5.20.
As mandated by the portfolio’s Business Plan, all dividends get reinvested right back into the same companies – a fee-free process informally called “dripping.” After buying MKC, I instructed the brokerage to “turn on the drip.”
If MKC is still trading at about $103 early this summer, the $5.20 will buy .051 of a share for the IBP. Then, three months later, the Income Builder Portfolio will get dividends based upon the new share total of 10.051 – making the October payment $5.23. In turn, that will buy another fraction of a share.
And if McCormick announces another 10% divvy hike around Thanksgiving (as it tends to do), the new quarterly payout will be 57 cents and the January distribution will be about $5.76.
Compounding is a key ingredient to building an enduring, successful income stream, and that’s what the IBP is all about.
Valuation Station
Due to its quality and consistency, McCormick rarely goes “on sale” — and it certainly is not a screaming bargain now. I consider it fairly valued, though I found analysts who place it on both sides of the valuation spectrum.
One of the more bullish analysts is CFRA. As the two graphics below show, it says MKC is about 9% undervalued and foresees 12-month gains of roughly 17% to $121.
Credit Suisse sees similar growth ahead for McCormick, with a similar target price.
Morningstar, meanwhile, thinks the stock is just a tick above fairly valued.
Nevertheless, Morningstar shows how just about all of McCormick’s metrics (red circled areas) are below the company’s 5-year averages (blue), and the forward P/E ratio is a solid 20.9 (green).
According to Value Line, MKC has a target price range of $125-$150 (as circled in green below), meaning it expects the stock to appreciate about 20% to 45% over the next 3-5 years.
Value Line also assigned MKC a “Relative P/E” (red circle) just over 1, indicating that its P/E ratio is slightly higher than the average of the 1,700 companies in VL’s analytical universe.
Finally, let’s look at a few illustrations using the FAST Graphs valuation tool.
The first shows that McCormick’s current “blended P/E ratio” of 22.6 is higher than the company’s normal ratio during this millennium. Notice that the end of the black price line sits higher than the blue normal P/E line, a sign of overvaluation.
But when we shorten the time frame to just this decade — a process that takes the Great Recession out of the equation — McCormick’s valuation is almost exactly in line with its norm.
And when looking at free cash flow rather than earnings, MKC appears to be a tad undervalued.
Free cash flow is a useful metric for Dividend Growth Investing proponents because a company’s ability to grow FCF directly affects its ability to grow its dividend.
Skin In The Game
I really shouldn’t wax poetic about a company without owning it myself, should I?
So after I returned from taking my dog for a walk Tuesday afternoon and noticed that MKC had dipped back under $103/share, I bought about $3,000 worth of it for my personal portfolio.
And with the money left over in my account, I initiated a similar-sized position in Disney (DIS) — just as I had promised in April, when I bought that company for the Income Builder Portfolio.
Wrapping Things Up
I am glad to say that I now personally own all 10 of the high-quality, name-brand companies that make up the IBP.
McCormick, especially, is one that I had wanted for quite some time, as it historically has performed well even in the overall market’s down stretches.
Over time, I will be building up the position in my personal portfolio, and I’m guessing I eventually will be adding to MKC in the Income Builder Portfolio, too.
Naturally, I strongly urge investors to do their own research before buying any stock.
— Mike Nadel
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