Growth Analysis
McCormick’s growth strategy is to:
- Build brand equity
- Accelerate innovation
- Expand through acquisitions
The company spends about 5% of revenue on brand building through advertising, as discussed in the competitive advantage section of this article.
McCormick spends around $60 million a year on research and development. This is quite high for a company in such a slow changing industry. McCormick uses this spending to continuously push out a broad array of new flavors, packaging, and other tweaks to its existing product portfolio.
The company is also upgrading the quality of its ingredients. Within 1 year, 70% of the McCormick brand spices, herbs, and extracts will be Non-GMO.
McCormick & Company, Incorporated (NYSE:MKC) has been very active lately with acquisitions. In 2015 alone, the company has made 3 significant acquisitions:
- Drogheria spices for $79 million
- Brand Aromatics for $63 million
- Stubb’s barbeque sauces for $100 million
The image below summarizes the company’s important acquisitions over the last several years:
Source: McCormick Barclay’s Global Consumer Staples Presentation, slide 38
Recession Performance
When recessions hit, people tend to eat out less and cook more at home.
This trend benefits McCormick and allows the company to grow through recessions. McCormick’s earnings-per-share through the Great Recession of 2007 to 2009 are shown below:
- 2007 earnings-per-share of $1.92 (new high)
- 2008 earnings-per-share of $2.14 (new high)
- 2009 earnings-per-share of $2.34 (new high)
As you can see, McCormick & Company hit new earnings-per-share highs each year through the Great Recession. In fact, the company has grown earnings-per-share every year since at least 1999.
Valuation & Final Thoughts
McCormick & Company is a high quality business with a strong competitive advantage in a slow changing industry; exactly what long-term investors should look for.
Additionally, the company is committed to paying rising dividends and holding a 40% dividend payout ratio while continuing to repurchase shares; the company is very shareholder friendly.
Unfortunately, McCormick and company is not trading for a bargain. The company currently has a price-to-earnings ratio of 23.9. Over the last decade, McCormick’s price-to-earnings ratio has averaged about 18.5. The company appears overvalued at current prices.
Despite being a bit overvalued, McCormick and Company still ranks slightly above average using The 8 Rules of Dividend Investing thanks to its extreme stability and solid total return potential. The company is a hold at current prices. If the price-to-earnings ratio dips near 18, the company will make a compelling purchase for long-term investors.
Disclosure: None
