Colgate-Palmolive Company (CL), Exxon Mobil Corporation (XOM): Wait for These Overpriced Dividend Stocks to Fall

In terms of future dividend growth, I think the historical rate of about 9% is a reasonable estimate. Under that assumption the fair value of a share of Exxon Mobil Corporation (NYSE:XOM) is around $84, 8% below the current share price. Chevron Corporation (NYSE:CVX) is a better choice at today’s prices, with a 3% yield and similar growth prospects. I’ll add an entry in the watchlist for Exxon Mobil Corporation (NYSE:XOM) with a buy target of $84 per share.

Not spicy enough

McCormick & Company, Incorporated (NYSE:MKC) is an interesting company. With a dominant share of the North American spice market the company generates solid and consistent profits. What’s more, in addition to selling premium, higher-priced spice products the company is also the leader in the private-label spice market. This gives the company exposure to those who buy cheaper spices.

McCormick & Company, Incorporated (NYSE:MKC) has been growing steadily, even through the financial crisis, with revenue growing at an annualized rate of 6.5% over the past decade. Net income has grown a bit faster at a rate of 7.6% annualized, and the dividend has grown by 11.6% per year. The yield, however, is quite low at just 1.92%.

The dividend eats up about 48% of the free cash flow, with buybacks recently eating up almost as much. For a company like McCormick, which currently trades at a premium multiple, I think buybacks aren’t the best idea. Raising the dividend would be a better use of the free cash flow, increasing the yield and making the stock more attractive. With the stock trading at over 20 times earnings the buybacks are likely wasting a lot of money.

The historical rate of about 11% dividend growth looks like it can be sustained. Under that assumption the fair value of a share of McCormick is around $53. This is far below the current stock price, a full 25%, and just goes to show how overvalued McCormick is right now.

McCormick is one of those companies that I’d love to own, but not at the current price. I’ll add McCormick to the watchlist with a buy target of $53.

The article Wait for These Overpriced Dividend Stocks to Fall originally appeared on Fool.com and is written by Timothy Green.

Timothy Green has no position in any stocks mentioned. The Motley Fool recommends McCormick. Timothy is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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