Competing surveys present a conflicting picture for food stocks. In 2017, the USDA reported that, for the first time, Americans were spending more money eating at restaurants than they were eating at home. Yet the restaurant industry is still no sure thing. In 2018, the Census Bureau reported that sales at U.S. restaurants and bars grew just 2.8%, the slowest growth since 2009 lagging behind even retail sales.
To support this, the NPD Group, a leading global information company said that U.S. consumers are increasingly eating and preparing their meals at home with four out of five meals prepared at home. This would make sense since Millennials and Generation Z, who are the “early adopters” for apps such as GrubHub and Uber Eats, are becoming increasingly aware that home meal delivery is an expensive way to go through life, particularly if they are dealing with student loans.
Adding even another layer of complexity to these surveys is the emergence of companies such as Blue Apron and Hello Fresh which blur the line between foodservice and made at home. Or does it? In 2016, ReportLinker released a survey in which 98% of Americans said that cooking at home was still their preferred way to prepare a meal. In 2017, a separate study reported that only 10% of Americans loved to cook.
But loving to cook and actually cooking are two very different things. The takeaway for me is that many consumers aspire to prepare a home-cooked meal, but are looking for the “cooking hacks” to help them get the results they want. And that’s what makes this dividend stock a spicy choice for investors.
McCormick (NYSE:MKC) has been delivering steady growth year after year. The spice and seasonings brand is projecting a 3-5% growth in sales in 2019. That number may be slightly lower than the company management’s target of 5% per year. However, it should still be enough to allow the company to increase its market share. And executives predict that aggressive marketing spending will lead to faster gains in the quarters to follow.
Profitability is rising
Earlier this year, McCormick went on a buying spree, acquiring new brands like French’s condiments and Frank’s hot sauces. These acquisitions are giving McCormick a more profitable sales mix. The company’s gross profit margin of 41.9% has remained steady over the past 12 months.
As of this writing, the company has a P/E ratio of 32.93. This is higher than the sector average which implies that investors still feel good about the company’s growth prospects. And despite the recent decline in EPS, the company’s EPS is still up 11% over the last five years.
Some analysts have concerns
Among the concerns that analysts have is the increased debt from the recent acquisitions. The company’s net debt now totals 21% of its market cap which is approximately $20.7 billion. This new debt, along with the company’s recent dip in EPS (it’s down 19% in the last 12 months) seems to be acting as a drag on the stock. In the last 30 days, the stock is down 0.63% and has a gain of just 2.71% in the last 3 months. However, over the past 12 months, the stock has gained an attractive 24.42%.
The price target for McCormick is around $140 per share. This is significantly lower than the stock’s current share price of $156. Yet another concern is the lack of insider buying. Although the company insiders own a fair bit of the stock (approximately 0.5%), there has been no insider buying in the last three months, but there has been one significant insider sale. I tend to dismiss this because insiders can have many different reasons for selling a stock, many of which have nothing to do with their perceived perception of the stock’s future performance.
The company is paying down the debt
Nevertheless, all of these data points are leading some analysts to say the stock is overvalued. I might agree with that except that the company is using its profit to increase its already robust cash flow. Management seems committed to quickly pay off the new debt they took on to fund their acquisitions. Not only should this give the stock price some room for further appreciation, but it should give the company plenty of cash to apply to what is already considered a super safe dividend.
McCormick has a rock-solid dividend
Of course, the primary reason to invest in stock such as McCormick is the certainty that comes from their dividend. McCormick has been issuing a dividend for 93 straight years and has increased its dividend payout in each of the last 33 years. The current annualized dividend is $2.28 per share.
Companies Mentioned in This Article
|MCCORMICK & CO /SH (MKC)||$161.97||-0.1%||1.41%||32.59||Hold||$153.83|
|Blue Apron (APRN)||$7.49||-6.7%||N/A||-0.79||Hold||$22.51|