Like other high quality dividend growth stocks, we can see that MKC has been a free cash flow machine. Rising free cash flow lets MKC steadily raise its dividend and pursue acquisitions to expand its product line and geographical reach. MKC was even able to grow its free cash flow per share each year during the financial crisis. It doesn’t get much safer than that!
Source: Simply Safe Dividends
MKC has created significant value for shareholders, earning a double-digit return on invested capital each of its last 10 fiscal years. Its profitability was also very stable throughout the last recession. These are often the signs of a blue chip dividend stock that enjoys several competitive advantages, which we believe MKC does.
Source: Simply Safe Dividends
Looking at the balance sheet, MCK carries a significant amount of debt ($1 billion) compared to its cash on hand ($108 million). However, the consistency of the company’s free cash flow generation and slow-changing nature of its end markets reduces MKC’s balance sheet risk. The company also received a nice “A2” credit rating from Moody’s in 2015.
Source: Simply Safe Dividends
Dividend Growth Score
Our Growth Score answers the question, “How fast is the dividend likely to grow?” It considers many of the same fundamental factors as the Safety Score but places more weight on growth-centric metrics like sales and earnings growth and payout ratios. Scores of 50 are average, 75 or higher is very good, and 25 or lower is considered weak.
MKC’s dividend growth potential is very strong with a Growth Score of 73. The company is a dividend aristocrat and has raised its dividend for 30 consecutive years, including an 8% boost in November 2015. As seen below, MKC has grown its dividend at about a 9% annual rate over the last 5- and 10-year periods.
Source: Simply Safe Dividends
Going forward, we expect dividend growth to continue at a similar pace. MKC’s objective is to maintain an earnings payout ratio of 40%, which is about where the company is at today. In other words, future dividend growth needs to align with earnings growth, which management expects to be 9-11% per year, to keep the payout ratio constant.
Valuation
McCormick & Company, Incorporated (NYSE:MKC) trades at about 23x forward earnings and has a dividend yield of 2 %, which is about in line with its five year average dividend yield but not great for investors living off dividends in retirement.
However, this is a wonderful business that has increased its total shareholder return at a double-digit rate over the past 1-, 5-, 10-, and 20-year periods, an amazing accomplishment.
While currency headwinds and raw material cost volatility could impact earnings over the near term, we believe the company is capable of growing its earnings at a high-single digit rate for at least the next five years. If this scenario plays out, MKC appears to offer 9-11% annual total return potential.
Conclusion
Few companies have demonstrated the consistency that MKC has over the last 100 years. The company’s dividend safety and growth prospects are excellent, and the business should benefit over time from competing in slow-changing, steadily-growing markets. There’s really not much to dislike about MKC, other than its valuation. We will certainly keep an eye on MKC for our Top 20 Dividend Stocks portfolio.
Disclosure: None
