Updated January 23, 2023 Nathan Parsh
To become a Dividend Aristocrat, a company must have a strong brand and a dominant position in the industry. Dividend Aristocrats, his group of 65 companies in the S&P 500 index, has been increasing its dividend for over 25 consecutive years.
With this in mind, we have compiled a list of all 66 Dividend Aristocrats.
Click the link below to download a free copy of the Dividend Aristocrats List, along with key financial metrics such as price-to-earnings ratio and dividend yield.
A good example of a dividend aristocrat with an industry-leading brand is the consumer products company McCormick & Company (MKC). McCormick has paid a dividend every year since his 1925 and has increased it for 36 consecutive years.
The company’s consecutive dividend increases are due to its quality business. McCormick is his global leader in food grade spices, seasonings and flavors. It has grown its leadership position both organically and through acquisitions. This has driven McCormick’s dividend growth for many years and will continue to do so.
Business overview
McCormick was founded in 1889. Founder Willoughby M. McCormick began making flavors and extracts in his cellar and selling them door-to-door. Initially, the business grew at a moderate pace. In 1896, McCormick entered spice with the publication of the first McCormick His Cookbook. Over time, the company has steadily grown into one of the world’s leading spices and seasonings companies.
McCormick & Company manufactures, markets and sells seasoning mixes, spices, condiments and other products to customers in the food industry. Major brands include McCormick, Lawrys, Stubb’s, Club House, Ducros, Schwartz, Kamis, Kohinoor, Zatarains, Thai Kitchen and Simply Asia.
With a market capitalization of $20.8 billion, it’s a large cap.
McCormick will report third quarter results on October 6, 2022.
Source: Presentation for investors
Revenue in the quarter increased 3.2% to $1.6 billion, beating estimates by $10 million. Adjusted earnings per share for the quarter were down 13.8% to $0.69, $0.03 below expectations.
Results for the two segments were mixed during this period.
Source: Presentation for investors
Growth in the consumer segment was slow, with sales increasing only 0.7%. The 10% price increase was largely offset by his 5.7% decline in volume and mix and his 2.7% headwind from currency. He also deducted 0.9% from the results of the business sale. The Americas increased his 2.8%, Asia/Pacific improved her 5.8% and EMEA decreased 12.7%.
Flavor Solutions, meanwhile, continued to recover from the worst of the Covid-19 pandemic as sales increased by 8.4% in the quarter. Prices were up 9.3% for him and volume and mix were up 0.8% for him. Currencies acted as a 3.7% headwind to the outcome. The Americas improved 9.2%, Asia/Pacific grew his 4.8% and EMEA fell 1.3%.
McCormick led adjusted earnings per share toward $2.63 to $2.68 in 2022. This represents a 12.8% decrease from the previous year at the midpoint of guidance.
growth outlook
Going forward, growth in emerging markets and acquisitions provide McCormick with ample room for continued growth. First, international growth is a powerful catalyst for McCormick. China’s slow reopening following strict pandemic-related restrictions is already paying off for the company.
Increased demand and higher prices for herbs and spices also contributed to the increase in sales in the region. Apart from that, acquisitions are a major part of McCormick’s growth strategy.
In 2018, McCormick acquired Frank’s Red Hot and French’s as part of its $4.2 billion acquisition of RB Foods, the food division of consumer goods giant Reckitt Benckiser (RGBLY). This is the largest deal in McCormick’s history and is already a growth engine for the company.
McCormick is leveraging its industry leadership position to rapidly expand these top brands globally. Frank’s RedHot is the number one hot sauce brand in the US and French’s is the leader in the mustard category. A common theme in McCormick’s M&A strategy is to look for top brands that lead their respective categories and can scale easily.
The recent acquisitions of Cholula Hot Sauce and FONA International have made this theme clear again. First, in November 2020, McCormick acquired Cholula, a premium Mexican hot sauce brand, for his $800 million. The acquisition fits perfectly into McCormick’s strategy of acquiring top quality brands and expanding them rapidly.
McCormick followed this up by acquiring FONA International in December 2020. FONA International is a leading manufacturer of clean, natural flavors with customers in the food, beverage and nutrition markets. McCormick bought FONA International for $710 million in cash.
We expect the company’s various acquisitions, combined with its strong unique brand, to lead to significant earnings per share growth going forward. McCormick estimates that earnings can grow at an annualized rate of 9% through fiscal 2028.
Competitive Advantage and Recession Performance
McCormick’s two most important competitive advantages are its brand strength and global reach. McCormick is a leading brand in the global spice and seasoning industry with growth potential over the next five years.
As a result, this gives McCormick influence over retailers and pricing power. These qualities help the company generate consistent profits year after year, even when the economy hits a recession.
McCormick has been successful in growing earnings per share each year during the last recession. Here’s his earnings per share during the Great Recession:
- Earnings per share of $1.92 in 2007
- Earnings per share of $2.14 in 2008, up 11%
- Earnings per share of $2.34 in 2009, up 9.3%
- 2010 earnings per share of $2.65, up 13%
As you can see, McCormick & Company grew earnings per share each year during the Great Recession. Not only that, but the company averaged double-digit annual growth each year, which was pretty impressive and a very rare achievement even for a dividend aristocrat.
Valuation and Expected Return
At the midpoint of its full-year guidance, McCormick expects adjusted earnings per share this year to be approximately $2.66. As a result, the stock trades at 29.7 times his price/earnings ratio. This outperforms the fair value price/earnings ratio of ~23.
McCormick’s valuation multiples have expanded significantly in recent years as the company has experienced strong earnings growth. Still, the stock appears to be grossly overvalued. If the stock returns to target P/E by 2028, valuations will face a -5.0% headwind to annualized returns over this period.
Fortunately, returns to shareholders come from expected earnings growth and dividends. The company’s strong brand and multiple catalysts for future growth should also lead to higher growth.
The total annual return over the next five years could be 5.8%. That’s because 9% earnings growth and a 2% starting dividend yield are offset by 5% valuation headwinds.
That said, McCormick is a high-growth dividend stock. The company has increased its dividend by 9% annually over the past decade. The company recently increased its quarterly dividend in November 2022 by 5.4%. McCormick has a healthy 56% payout ratio based on projected adjusted earnings per share for fiscal 2022. This means McCormick should continue to increase its annual dividend for years to come.
final thoughts
McCormick dominates the spice and seasoning category. Its strong brand offers the company high margins and growth opportunities in both the U.S. and international markets.
McCormick’s dividend yield is over 2% and has a history of very strong dividend growth. The company should be able to raise its dividend every year, probably in the mid to high single digits.
That said, we think the stock is currently on hold because of the expected returns. It has a premium valuation multiple, and while it can argue that a quality company like McCormick deserves a higher stock valuation, its expected return is mediocre.
That said, if the stock falls significantly, we’ll be McCormick buyers, lowering valuations and increasing dividend yields.
Additionally, the following Sure Dividend databases contain the most reliable dividend growers in our investment universe.
If you’re looking for stocks with unique dividend characteristics, consider the Sure Dividend database below.
Major domestic stock market indices are another solid resource for finding investment ideas. Sure Dividend compiles and updates the following stock market databases monthly.
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