Some of my favorite (and best) investments have been in companies that produce mundane products that you see everywhere.
It’s been said that successful investing should be like watching paint dry – boring.
If you look over David Fish’s Dividend Champions, Contenders, and Challengers list, you’ll find more than 600 US-listed stocks that have increased their respective dividends for at least the last five consecutive years.
What you’ll also find are a lot of businesses that aren’t exactly everyday names, yet provide the necessary products and/or services that basically make the world go round.
[ad#Google Adsense 336×280-IA]And they profit from being in that position.
Even better, they share a good chunk of those profits with their shareholders in the form of dividends.
Take a company like McCormick & Company, Incorporated. (MKC), for instance.
They’ve been in business since the late 1800s and provide almost necessary products to billions of people around the world.
Those products include seasonings and spices, as well as condiments.
You probably don’t think about this company a lot and might not even be familiar with them if someone mentions their name.
Yet, if you use seasonings or spices like oregano, cinnamon, or black pepper, you’ve likely come across their products.
Yawn, right?
Exactly.
Boring is beautiful when it comes to making money. I’ll show you.
They’ve increased revenue at a compound annual growth rate of 5.59% over the last decade, up from $2.526 billion in fiscal year 2004 to $4.123 billion in FY 2013.
Earnings per share have grown from $1.52 to $2.91 during this period, which is a CAGR of 7.48%. Not too shabby for a boring business like spices and seasonings.
S&P Capital IQ is calling for 9% compound annual growth in EPS over the next three years. They believe recent acquisitions such as Wuhan Asia-Pacific Condiments Co., Ltd. and continued share repurchases will help propel solid growth over the foreseeable future.
I’m a dividend growth investor. I’m guessing if you’re reading this article, you are too. Or you’re at least interested in dividend growth investing.
And McCormick is a prototypical dividend growth stock with 29 consecutive years of dividend raises.
You can’t increase dividends for almost three straight decades without doing something extremely right.
Meanwhile, the dividend raises themselves are right in my wheelhouse, with a 10-year dividend growth rate of 10.2%.
Factor in a yield of 2.16% and you can see the attractive nature of this stock. You get an above-average yield with a long-term track record of growth at a level well above inflation, meaning your purchasing power is constantly increasing.
The payout ratio stands at 50.3%, which is almost a perfect 50/50 mix of returning profit to shareholders and retaining earnings for reinvestment into the business.
McCormick’s balance sheet is leveraged, but not concerning. The long-term debt/equity ratio is 0.53, while the interest coverage ratio (a measure of how many times EBIT can cover interest expenses) is 10.37. Both of these numbers indicate liquidity and good financial health.
There’s clearly profitability in spices and seasonings as well, with a net margin that’s averaged 10.04% over the last five years. Return on equity has averaged 25.24% over that time frame.
So you can see that there’s a lot to like in the business of seasonings and spices. This is a business that’s been around about as long as civilization, and it’s unlikely that it’s going to go anywhere anytime soon. Meanwhile, McCormick is the dominant player in this market, with about a 20% share of the global spice market.
And through their geographical diversification – they sell their products in more than 110 countries – they’re exposed to both developed an developing markets, both of which purchase what they manufacture and provide.
One other interesting aspect about the company is that they’re not just exposed to consumers. They also have a healthy industrial business, where they sell spices to other in the commercial space to other businesses in the food and beverage industry.
I view this business as a low-risk investment. However, one does need to consider that the company faces various input costs from raw materials that can oscillate. In addition, like most other US multinational companies, they face currency exchange risk since they do business all over the world.
Shares in MCK are trading hands for a P/E ratio of 23.29, which is just a little higher than their five-year average of 21.2. This is a premium to the market, but it appears this stock usually trades at a premium.
I valued shares using a dividend discount model analysis with a 10% discount rate and a 7.5% long-term growth rate. This is in line with their long-term growth rate in EPS, which is probably what the dividend will grow at from here with a 50% payout ratio. However, there could be a slight margin of safety there since earnings per share are expected to grow at a higher rate. The DDM analysis gives me a fair value on shares of $68.80.
Bottom line: McCormick & Company, Incorporated (MKC) is a very old, very successful company operating in an industry that’s been around about as long as modern civilization has. Food as we know it practically cannot be consumed without the products MKC manufactures and markets. This puts them in an extremely enviable position. Their growth has been solid, the business is in excellent shape, and it appears roughly fairly valued right now. And almost three consecutive decades of increasing dividends speaks for itself. This is a stock that could be considered a core holding in a high-quality portfolio. If you’re ready to season up your dividend income, MKC might fit the bill.
— Jason Fieber, Dividend Mantra
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