The yield is only 1.40% although at a sustainable 23% payout ratio. At 7,600 stores in 45 states it is right in the middle in size between Dollar Tree, Inc. (NASDAQ: DLTR) and Dollar General Corp. (NYSE: DG). With sequestration and a pinched consumer one would think Family Dollar would be on fire again. The return on equity is 33.77% but the company lowered guidance at the last earnings release, announced shrinking margins, and barely beat last years’ earnings for the same quarter, making only a penny more. The company has total debt of $725.36 million to total cash of $121.83 million.
Competitor Dollar Tree has been soaring after better-than-expected earnings so it’s not the sector at fault. I have liked Dollar Tree better for some time as it has better growth prospects and could conceivably initiate a dividend. If it did there would be little reason to be in Family Dollar. For these reasons I think Family Dollar is a no-go.
Yellow means slooow down
McCormick & Company, the global spice and seasonings monger, hit a multi-year high on March 4 of $69.26. This takes it up 37.26% over the last year alone. It’s growing in emerging markets (a new plant in China and special status there as an honored brand) and has number one market share in the majority of brands. It’s just one among many consumer staples to benefit from surprising interest and strength. So what’s not to like?
McCormick has more than ten times total debt to total cash (mainly due to recent non-spice acquisitions) so there’s a yellow light right there and the PEG has climbed to 2.53. Also the short interest has increased by 11% since the end of January obviously expecting a pullback from these recent highs. Caution with McCormick is really a valuation call as this is still a great company with growth globally as well as a sterling reputation for quality.
At a 22.77 P/E and a 2.00% yield Warren Buffett could just as easily have bought McCormick rather than H.J. Heinz Company (NYSE: HNZ). Heinz is actually a customer of McCormick as are big cap names like PepsiCo, Inc. (NYSE: PEP), SYSCO Corporation (NYSE: SYY), McDonald’s Corporation (NYSE: MCD), Yum! Brands, Inc. (NYSE: YUM), and General Mills. Unlike Leggett & Platt I don’t see any of these customers canceling orders with McCormick. Kraft Foods Group Inc (NASDAQ: KRFT) is also a customer but as McCormick branches out from spices into shelf-stable products like seasoned rices (Zatarains’) Kraft and Unilever may soon become competitors.
McCormick has more than doubled since its 2009 low in the thirties. If only, if only, it hadn’t run so far.
The final traffic report
Leggett & Platt, Inc. (NYSE:LEG) should be approached with caution and investors should be willing to take an alternate route for yield. Just drive by Family Dollar and if you have to buy a dollar store stock, consider Dollar Tree. If the previous two had no yield there would be little compelling about the stocks. As for McCormick, even without yield it would be interesting but take it easy with this one. It’s a great company, doing all the right things but the market has taken it too far, too fast. I’m only going to write you a warning this time.
The article Danger Ahead With These Dividend Aristocrats!! originally appeared on Fool.com and is written by AnnaLisa Kraft.
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