Thursday, January 14, 2010

McCormick and Company - Stock Analysis for Dividend Growth Portfolio

McCormick & Company Inc (MKC) is the world's largest spice company, with operations in the manufacture, marketing and distribution of spices, seasonings, flavorings and other specialty food products. The company markets its products to retail food, foodservice and industrial markets under the McCormick and Schilling brand names.

MKC is member of Mergent’s Broad Dividend Achiever Index and S&P500 Index. The most recent dividend increase was in December 2009.

Trend Analysis
Here I am looking at trends for past 9 years of company’s revenue and profitability. These parameters should show consistently growth trends. The trend charts is shown in image below.

  • Revenue: In general, a growing trend since 2000. The average revenue growth for last 9 years has been approximately 5% (std dev of 4.8%). It is expected to be flat in year 2009.
  • Cash Flows: Seems to be cyclic. In general, operating cash flow is more than net income. The free cash flow also seems to be cyclic.
  • EPS from continuing operation: Overall, an increasing trend. Expecting to be flat-to-negative in 2009.
  • Dividends per share: Growing trend.

Risk Parameter Calculation

Here I use the corporation’s financial health to assign a risk number for measuring risk-to-dividends. The risk number for risk-to-dividends is 1.9. This is a medium risk category as per my 3-point risk scale. The negative EPS growth and historically high payout factor makes in medium risk to dividend.

Quality of Dividends

This section measures the dividend growth rate, duration of growth, consistency over a period of past five years.

  • Dividend growth rate: The average dividend growth of 11.2% (stdev. 4.7%) is more than average EPS growth rate of 7.7% (stdev. 7%).
  • Duration of dividend growth: Consecutive dividends growth for more than 10 years.
  • 4 year rolling dividend growth rate for past ten years: Less than 10%.
  • Payout factor: It has been less than 50% since 2000.
  • Dividend cash flow vs. income from MMA: Here, I analyze how the dividend cash flow stacks up against the income from FDIC insured money market account. The baseline assumption is (a) stock is yielding 2.5%; and (b) MMA yield is 2.3%. With my projected dividend growth of 8.2%, the dividend cash flow is 1.91 times the MMA income in 10 years time period. For dividend cash flow to be twice the MMA income, the pricing has to be $27.0 (i.e. yield 3.6%)

Fair Value Calculation

This section determines what price I should pay to buy a given stock

  • Net present value (NPV) price based on 15 year DCF: $28.9
  • Average high yield price calculated based on past 10 years: $34.5
  • Pricing based on past 10 year relative price-to-earnings ratio. $36.4
  • Pricing based on price-to-earnings ratio of 12: $20.7
  • Graham number: $19.1

The range of fair value is calculated as $23.9 to $27.9.

Qualitative Analysis

MKC is a founded in 1889 and is worlds largest spice company. Its growth model consists of growing by acquisition, focusing on higher-margin products, and cost reducing efforts.

  • Its revenue sources are geographical diverse with 55% from US, while the rest from other developed countries. much focused in US markets (with some presence in Canada and Mexico).
  • It also have two major business segments, consumer (58% revenue, 81% operating profit), and industrial (42% revenue, 19%).
  • It continues to have stable gross and operating margins. It continues to generate operating cash flows.
  • The risk factor is the liabilities, particularly if its revenue does not grow.


MKC is a slow growing company. I expect MKC to continue to have a sustainable cash flow and dividend growth over next few years. I like its geographical diversification and strong brand in spice consumer market. MKC is trading at $37.7 which is approximately 35% higher than what I would be willing to pay. I would be open to add MKC when in my buy range.

Full Disclosure: No positions at the time of writing.

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