Spice and condiment maker McCormick & Company, Incorporated (NYSE:MKC), one of the so called “boring” companies, gave investors a 115% total return versus 25% for the S&P 500 over the past five years as of this writing (see chart below). The nine reasons below explain why this company will continue to provide market-beating returns for its owners.
1. A robust consumer business. Revenue and operating income in McCormick & Company, Incorporated (NYSE:MKC)’s consumer business division grew 7% and 8%, respectively, in the most recent quarter. Individuals, under pressure from fuel and food costs chose to eat at home more, serving as a catalyst for this business. In other words, why spend the gas money to drive 10 miles to the nearest fast food restaurant when you can grill a burger at home? According to its latest earnings call, McCormick’s Grill Mate items accounted for 23% of the increase in volume.
2. The industrial segment will recover. Revenue and operating income in McCormick & Company, Incorporated (NYSE:MKC)’s industrial segment, catering to restaurants and food manufacturers, fell 2% and 22%, respectively, in the last quarter. Fears about tainted chicken as well as pressures on consumer discretionary income encouraged people to cook and grill at home. In addition, a growth retraction in the Chinese economy dampened growth in this segment. McCormick anticipates these fears will subside and things will turn around for this segment, giving a boost to the overall company.
3. Product innovation. In an effort to maintain consumer interest, McCormick continues to make additions to its broad portfolio of products. For example, in the U.S. McCormick & Company, Incorporated (NYSE:MKC) added recipe mixes with smoked paprika and Tuscan beef stew flavoring, according to its last earnings call. In addition, it added 12 toppings and cake mixes to its dessert portfolio in its European, Middle East, and African segment.
4. Brand equity. New flavors, new recipe mixes, and packaging innovation builds brand equity; an important endeavor in the highly commoditized world of food flavoring. In fact, better packaging drove sales in its consumer business in China. In addition, McCormick wants to maintain brand awareness among its consumer base by ensuring that its products sit on the shelves wherever a customer shops.
5. Huge employee ownership. According to McCormick & Company, Incorporated (NYSE:MKC)’s latest proxy statement, it shows a 21% ownership stake by employees via its 401K retirement plan. Employees and management generally take better care and pride in a company when they share in the risks and rewards of ownership. This fact should give you comfort.
6. Continuous improvement. McCormick shows its conservative financial nature with its comprehensive continuous improvement program, a cost savings program aimed at “saving at least $45 million in 2013.”
7. Plenty of cash and investments. McCormick possesses $69 million in cash and $328 million in investments on its balance sheet for a combined total of $397 million or 23% of its equity base. This gives the company ample financial capability for product innovation, acquisitions, and future dividend increases.
8. Dividends. In 2012, McCormick paid out $165 million in dividends representing a reasonable 48% of its free cash flow. As of this writing, McCormick & Company, Incorporated (NYSE:MKC) pays $1.36 per year per share in dividends, translating into a 1.9% yield.