Is It Time To Buy Dividend Aristocrat McCormick?

McCormick Rises After Upgrade

When searching for great investment opportunities in this post-pandemic world I keep turning up the same thing. Blue-chip quality dividend-paying companies with a history of distribution increases. I’ve found great choices in several sectors and industry groups including technology and consumer staples. Invariably, within each group is usually a stock or two with the Dividend Aristocrat or Dividend King Pedigree.

Today is no different. An upgrade for McCormick (MKC) from Credit Suisse alerted me to yet another possible opportunity in a Consumer Staple company and Dividend Aristocrat. Credit Suisse upgraded McCormick to Outperform from Neutral citing increased demand driven by stay-at-home and cook-at-home trends post-pantry-loading. The question now is whether it’s time to buy this stock or wait for the next big dip.

A Shift In Analyst Sentiment Could Be At Hand

Even with today’s upgrade, the average analysts’ rating is still neutral with a bearish bias. Out of the 13 current ratings 5 are neutral and nearly half, 6, are bearish. Today’s upgrade brings the bullish count to only 2 which raises two interesting possibilities. The first is that Credit Suisse was wrong to upgrade the stock. The second is that the other analysts are slow in upgrading this pillar of the culinary world and that means an analyst-driven rally could be in the works.

A few weeks ago Wells Fargo’s John Baumgartner had this to say about the food-based consumer staples industry.

"Significant uncertainty abounds re: COVID's prolonged impact but we expect Food to outperform vs. S&P and Staples peers given: (1) limited intl. supply chain risks vs. other S&P sectors, (2) benefits from increased at-home consumption, (3) defensive rotation/Food’s historical outperformance vs. S&P 500/Staples peers during economic dislocations." 

What The Data Has To Say

The data from Nielson shows the entire food industry saw astronomical YOY gains in revenue during March. According to the most recent survey, during the four-weeks ended April 4th McCormick saw its YOY revenue grow by 63%. This makes it the third-strongest performer in terms of the pantry-loading period of the pandemic and well-positioned for longer-term strength.

What the data also shows is that sales began to fall off in the final week of the period. What this means is that pantry-loading was slowing down because pantries were filling up across the country. Now, this may be anecdotal but I speak from long experience as a home cook, you can’t live without spices and herbs, and a jar of spices will only make so many meals.

Just like the milk, eggs, and bread, the spices, herbs, marinades, and mixes will also need replenishing. The longer the lock-downs and social-distancing last the longer these trends will last for McCormick. And remember, the restaurants are going to be among the last businesses to really get reopened.

A Great Dividend-Payer With One Flaw

McCormick is a great dividend-payer, don’t get me wrong, but there is a flaw that may make it less attractive than its food-industry peers. The yield is a low 1.5% when you can get a good 2.5% to 3.5% with other names in the group. I mean, even Campbells (CPB), which is one of the hottest pandemic-driven trades, is still yielding over 2.6%. The mitigating factor is that McCormick is a laggard in the market and could easily post a double-digit pop in the very near future. As for dividend health and growth, the payout ratio is under 50% and the distribution has been growing for 33 years.

Stocks like Campbells and Clorox (CLX), both important names in the pandemically-boosted consumer products/food industries, are both up since February 20th, the day the market began to correct. The S&P 500 is still well below that high point, McCormick only now tickling it. Today’s price action looks bullish and could easily take it to new highs. If that were to happen I would be a buyer of this stock. If not, well if not, McCormick may see a quick correction before the next big wave of buying begins.