Investment legend Benjamin Graham, who helped to train Warren Buffett, wrote that there's a difference between what you pay and what you get when you buy a stock. Essentially, pay too high a price for even a great company and it can turn out to be a bad investment.
That's been the challenge historically with McCormick (MKC +1.35%). But now, after a 20% pullback from recent highs, long-term investors may want to take a second look.
You can count on McCormick
McCormick is a big player in the seasoning space, which sounds very boring and, well, it kind of is. Selling spices to consumers and businesses just isn't a headline-grabbing affair. But it is a reliable business, highlighted by the company's impressive 36-year streak of annual dividend increases. You don't achieve a record like that by accident.
Image source: Getty Images.
Adding to the dividend allure here, the annualized dividend increase over the past decade has been roughly 9%. That probably seems modest given today's high rate of inflation growth, but the historical average growth rate of inflation is in the low single digits. So McCormick has really rewarded investors quite well on this front, noting that the 9% figure stands over the trailing one-, three-, and five-year spans, as well. Reliable is the word that comes to mind, again.
The company breaks its business down between consumer and flavors divisions -- what it sells to people through grocery stores and what it sells to business customers like food makers. The company offers its products around the world, as well, so there's a fair amount of diversification given the company's inherent focus on spices.
Meanwhile, with a debt-to-equity ratio of roughly 1.15 and a trailing-12-month interest coverage ratio of 7, McCormick is on solid financial footing. This is the kind of company you buy and hold...and hold...and hold for a very long time.
Not cheap, but...
The thing is, investors are aware of how well-run a company McCormick is and, thus, it is rarely if ever cheap. And despite the 20% stock pullback, it would be difficult to suggest that this consumer staples giant is trading at bargain prices.
For example, the price-to-sales ratio is only a touch below its five-year average. The same can be said of the price-to-book ratio. The price-to-earnings and price-to-cash flow ratios, meanwhile, are both a touch above their five-year averages. The dividend yield, at roughly 1.8%, is roughly in the middle of the range, historically speaking.
NYSE: MKC
Key Data Points
McCormick looks fairly priced. However, given its impressive long-term success and solid dividend growth, that's not exactly a bad thing. Indeed, if you are looking for a financially strong business with a history of putting up good results, McCormick could provide you a very nice mix of growth and income from its current price levels. Just go in knowing that you are paying a reasonable price for quality, not getting a bargain-basement deal.
But what about the current price weakness? That's likely a reflection of two factors. First, the market has been volatile and investors are skittish. The baby often goes out with the bathwater during times like this. Second, McCormick is legitimately dealing with inflation headwinds that are putting downward pressure on its margins. But that's not unique to this company; all food stocks are facing this issue. McCormick, like its peers, is working to pass its rising costs on to customers. It will just take some time for the inflation issue to be worked through.
For conservative types
As noted, McCormick is not a screaming value opportunity today. If that's what you are looking for you need to search for it elsewhere. But if you are a conservative growth and income investor, McCormick does appear to be reasonably priced for what it offers. In the end, buying a well-run company with an impressive dividend history at a fair price is hardly a bad outcome, particularly if your investment horizon is measured in decades and not days.
