Spicing Up Your Dividend Portfolio
Eric is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
A grocery shopper who faces budget pressures may have to give up pricier foods, but he can still make tasty meals on a smaller budget by using Heinz (NYSE: HNZ) and McCormick's (NYSE: MKC) seasoning products. In its 2011 Letter to Shareholders, McCormick mentioned that its spices can provide 90 percent of the taste of a meal, and 10 percent of the cost. This value factor protects McCormick from future downturns, and the company can also benefit from a good economy by selling high end spices. Ketchup maker Heinz shares many of McCormick's advantages.
McCormick showed solid growth during the last five years. Revenue rose from $2.9 billion in fiscal 2007 to $3.7 billion in fiscal 2011, while net income rose from $230 million to $374 million during the period. McCormick's earnings and net income actually improved every year during this period, which is very impressive, as 2008 and 2009 were terrible years for many companies. Even in 2009, when McCormick's revenue only grew by half a percent, the company's net income still rose from $256 million in 2008 to $300 million in 2009.
McCormick has also established a strong presence in international markets. As McCormick explains in its 2011 annual report, revenue from its consumer business segment in the Americas improved by 8.2 percent, while revenue improved by 13.5 percent in Europe and the Middle East and 22.5 percent in Asia. McCormick even flavored its 2011 annual report with the Indian seasoning garam masala to show off its expertise with Asian spices, although you can't smell the spice on the electronic version of the report.
In March, McCormick announced a quarterly dividend of 31 cents, and the company has steadily increased the size of its dividends for the last 26 years. McCormick split its shares in 2002, so the 2001 press releases that mention 20 cent per share dividends should be viewed as 10 cent per share dividends for comparison purposes. Yahoo Finance reports that McCormick has $233 million in levered free cash flow and a payout ratio of 42 percent, so the dividend seems sustainable even though McCormick's cash on hand of 54 cents per share looks low.
Heinz also sells products that can liven up a basic meal. Heinz built its reputation on ketchup, not spices, so it does have a few different input variables affecting its margins, but trends toward flavor enhancing products should help both companies. Both Heinz and McCormick had similar operating margins, with Heinz at 14.4 percent and McCormick at 14.5 percent, and McCormick's 9.7 percent profit margin beat out Heinz at 8.5 percent. Most notably, Heinz' international growth strategy parallels McCormick's.
Heinz' 3Q 2012 results show how international growth can make a major difference in a food company's sales. In the United States, Heinz' consumer products revenue actually fell by 1.1 percent, but Heinz sold more ketchup in rapidly growing markets, so its 3Q revenue actually rose by 7.2 percent. Heinz also reported stronger revenue growth in Asia than it reported in Europe, and Heinz' figures suggest that McCormick could also see strong growth from sales in Brazil and other South American nations.
Both Heinz and McCormick look well positioned to benefit from higher demand for seasoning products throughout the world. McCormick's growth during the recession was especially impressive. Heinz and McCormick are good defensive stocks, attractive for investors who want steady dividend income even if another recession occurs, and their international results show that these companies offer growth potential as well.
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