Summary
- Having raised its dividend for the past 33 years, McCormick is a Dividend Aristocrat.
- Despite the risks, McCormick possesses strong brands and a capable management team to navigate these risks.
- Unfortunately, McCormick's stock price is a bit too far ahead of itself, with the company trading at a 21% premium to fair value.
- Between the 1.5% yield, 8-9% earnings growth, and 1.9% annual valuation multiple contraction, McCormick is likely to deliver 7.6-8.6% annual total returns over the next decade.
- At a 1.8% yield, McCormick offers the same 8-9% earnings growth, but with a static valuation multiple, for annual total return potential of 9.8-10.8% over the next decade.
As a dividend growth investor, it has become abundantly clear to me that high-quality companies rarely come at a discount to fair value, especially in the midst of a decade-long bull market.
It's inevitable in a decade long bull market that many of the highest quality companies are trading at valuations that I believe to be slight to moderate premiums to fair value.
One such company that I believe is trading at a bit too excessive of a premium to warrant consideration as an investment at the present is McCormick (MKC), although it is a company I plan on owning at some point in the future.
Today, we'll be discussing the dividend safety and growth profile of McCormick, its fundamentals and risks, and the valuation aspect of a potential investment in the company.
I'll then conclude by offering both my annual total return estimate at the current price and at my estimated fair value entry point.
A Safe Dividend With High-Single Digit Long-Term Growth Potential
Along with fundamentals and valuation, dividend safety and dividend growth are highly important considerations for dividend growth investors.
In order for us to arrive at a conclusion regarding McCormick's dividend safety, we'll examine the company EPS and FCF payout ratios.
In its prior fiscal year, McCormick generated adjusted EPS of $4.97 against dividends per share of $2.03 during that time, for an EPS payout ratio of 41.0%.
For the current fiscal year, McCormick is guiding for adjusted EPS of $5.17-$5.27 against dividends per share of $2.28 (assuming an increase in the next dividend payable to $0.62), for an EPS payout ratio of 43.4%, using a midpoint range EPS figure of $5.25.
Moving to FCF, McCormick generated $821.2 million in operating cash flow against $169.1 million in capital expenditures, for total FCF of $652.1 million in its previous fiscal year (page 52 of McCormick's most recent 10-K). Against the $273.4 million in dividends paid during that time, this equates to an FCF payout ratio of 41.9%.
Similar to McCormick's EPS payout ratio, it's likely that the company's FCF payout ratio will remain fairly steady this fiscal year compared to last fiscal year, and stay in the low to mid-40% range.
When we take into consideration that McCormick's payout ratio is flawless for a consumer staple in my opinion and that the company's balance sheet is okay but not as great as past years, I would rate McCormick's dividend as safe.
