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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.
9. Market beating returns. McCormick operates in an industry where it’s easy to find a company with market-beating returns (see chart below). People like and need to eat. Shareholders in companies that cater to this powerful combination of want and need are richly rewarded.
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INGR Total Return Price data by YCharts
Industry peer Ingredion Inc (NYSE:INGR) makes ingredients such as corn starches, sweeteners for sodas and other ingredients commonly used in modern food and drug manufacturing. This represents another one of those so called “boring” companies that doesn’t compare to the excitement of computer giant Apple Inc. (NASDAQ:AAPL). Ingredion provides ingredients to a needed industry and is unlikely to succumb to obsolescence.
Ingredion’s revenue and free cash flow increased 75% and 100%, respectively, translating into a market-beating return of 92% over the past five years. This company provides a dividend of more than 2% to its shareholders as of this writing.
The J.M. Smucker Company (NYSE:SJM) makes jelly, peanut butter, and coffee, all items with significant brand recognition, and adds to the eating experience much like McCormick and Ingredion. Again, unlike Apple, you never need to worry about obsolescence in this industry. This company sports a great balance sheet, generates plenty of cash and offers a 2%+ dividend yield as of this writing.
J.M. Smucker’s revenue and free cash flow increased 125% and 376%, respectively, translating into a total return of 156% over the past five years, beating the total return of the S&P 500 by 131% points during that time.
Conclusion
In summary, McCormick possesses many qualities that make it the perfect addition to your portfolio. It sells a needed product that grows its top and bottom lines. It builds brand equity through new product marketing strategies, ubiquity, and packaging innovation; all important factors in differentiating a commoditized product. High employee ownership means increased pride and a sense of accountability among its workforce. Its comprehensive continuous improvement program means continued focus and discipline in cost savings and operational improvement. Its excellent balance sheet and cash flow support a solid dividend and it operates in an industry with a knack for outperforming the broader market.
The article 9 Reasons to Buy this Spice and Condiments Maker originally appeared on Fool.com.
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