Tough Comps and Declining Consumer Sales Makes McCormick a Hold

MKC stock has a solid dividend, but that may not be enough 

McCormick (NYSE:MKC) is holding on to a small gain 48 hours after posting first-quarter earnings. The company posted slight beats on the top and bottom lines. And, as expected, much of this growth is coming from the restaurant and food service categories.  

Nevertheless, the company is now entering a period of tough sequential and year-over-year comparisons. A key takeaway from McCormick’s earnings report is that the company is still facing supply chain and inflationary pressures. And the company is saying they will have to pass some of these costs along to the consumer.  

Considering that the company is already seeing a decline in revenue from its consumer segment. In fact, sales in this sector went from a 35% gain in the prior quarter to a decline of 2% in this quarter. Long-time McCormick stock observers may note a similarity to the pre-pandemic quarters.  

It may too early to tell. And at this point, it’s not having much effect on the stock post earnings. But investors may still need more data on the overall direction of the economy. 

Will Consumers Play Defense 

The economy is defying expectations. And it’s possible that the Federal Reserve may change its tone and/or course of action regarding monetary policy. That would be bullish for the economy, but likely would be bearish for McCormick.  

In the first place it would mean that the shift away from cooking at home would continue. And it may even accelerate as the pent-up demand for travel continues to be unleashed. Plus, if the Fed slows down, inflation will likely remain high. And that means that consumers may look for house-brand spices as they stock their pantries. 

But if the Fed stays the course, consumers will be feeling the pinch of higher interest rates. And while that may mean they will continue to cook at home, they will be looking to trim their budgets in any way they can. That would also argue for consumers looking to buy off-brand spices. 

A Good, But Not Great Dividend 

If you’re looking for a good dividend stock, McCormick is a good, but not great, option. On the plus side, McCormick is a Dividend Aristocrat having increased its dividend every year for the last 36 years. Analysts are concerned that the rate of growth may be slowing. However, that doesn’t put the dividend itself in any jeopardy.  

But for dividend investors who place important on dividend yield, there may be better options. Although dividend yield is a misleading metric, MKC stock currently has a 1.52% yield which is significantly below the sector average for consumer staples stocks which is 2.59%. 

MKC Stock is a Hold 

McCormick was clearly a pandemic winner. However, the stock was trending lower before getting a nice “Omicron-related” boost that dovetailed nicely with investors fleeing to the relative safety of defensive stocks in late 2021.   

With that said, the easy gains for MKC stock are gone. The company faces difficult comps as sales in its consumer segment fell 2% in the last quarter. And as we noted above, those numbers are likely to continue to fall as consumers either resume their normal dining patterns or look for lower cost options out of financial necessity.  

Either way, if you don’t have a position in MKC stock, the reliable dividend may not be enough of a reason to buy. However, this is one to have on your watchlist and if the market does take a more significant leg down, it may move more institutional money into this dividend aristocrat.