Fifty Shades of Gravy

AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

A McCormick & Co. (NYSE: MKC) annual report may not be as steamy as the bestselling Fifty Shades of Gray but it sure is spicy. The company's motto is "A Passion for Flavor" and the global leader in spices and seasonings mission statement is as CEO Alan Wilson said at an investor conference in April quite simply, "We're out to save the world from boring food."

The McCormick dividend history is anything but boring as it's an S&P Dividend Aristocrat with over 26 years of dividend raises with another just in the last few weeks for a current yield of 2.10%. The stock may have a low beta of .45 but it has doubled since the March 2009 low below $30 and has moved 31.85% over the last year. The company also boasts double digit compound annual EPS growth over the last decade. The P/E stands at a pricey 22.23 but forward P/E is 19.25.

Dive Into Decadence

Every year the company releases a forecast of flavor trends, this year going globally, and has identified several trends, including a dive into decadence. Indulgent flavors such as basil with chocolate and passion fruit and rum with orange and allspice. Other notable trends are flavor layering, healthy eating made more palatable with spices, handcrafted artisan flavors, and new global tastes such as Japanese Katsu and Mexican cajeta, a caramel sauce.

The importance of the forecast for investors is that industry professionals (commercial and foodservice clients) act on these trends and that the forecast allows McCormick to be a first mover as it jumped on the chipotle bandwagon almost ten years ago. These trends aid in new product development as the company introduces new products every year to spice things up. Commercial foodservice is slightly less than half the business, but McCormick has huge clients like Pepsi, McDonald's and Yum!.

Spices were the first commodity trade and have a place in history books as the impetus for world exploration. Today, McCormick scours the world for their spices and for acquisitions having made a big push into emerging markets like eastern Europe and India. Last year they bought an 85% stake in the Koh-I-Noor Indian food company and Kamis, an entire line of Polish sauces and seasonings. They also bought Thai Kitchen and Zatarain's to accommodate the popularity of Thai and Cajun cooking.

Thrilling Developments

Most investors may think of the Maryland based McCormick as just a staid dividend play but they might be thrilled to know that the company is also on the forefront of scientific research into the health benefits of spices with several studies underwritten by the McCormick Science Institute. Scientists are investigating antioxidant properties, vascular health, weight management, inflammation and how these relate to spices. The company is just beginning a campaign to inform the public of these health benefits.

Other companies such as Hershey's haven't been shy about touting the antioxidant properties of their products like their dark chocolate. McCormick could be even bolder on this front as the trend to healthier eating gets stronger every year.

Hot Opportunities

As CEO Wilson said at the investor conference,"There's a lot more room for growth. Did you know that half the steak and chicken that's prepared in U.S. homes is flavored with just salt and pepper or nothing at all?" The horror!! He noted that the variety of spices in the American pantry grew from just 10 a decade ago to 40 now adding,"Consumption of spices has grown almost 3x as fast as population growth."

Emerging markets expect to rise to 20% of sales by 2015. One advantage not readily apparent to investors is that globally, McCormick has a sterling reputation that their products are safe and clean, no small feat in third world countries. The company is also looking to buy out producers in its global supply chain to offset price volatility and ensure dependable sourcing and the safety and security of raw materials.

Other opportunities include more product roll-outs, with 200 products introduced in 2011. While the company actually only has 20 gravy flavors, the combined product portfolio is in the hundreds. The company with its purchase of Zatarains', Vahine, and stake in Koh-I-Noor is moving into rice, shelf stable mixes, ready to eat desserts, and frozen entrees. CEO Wilson expects to move more from ingredients to new value added products with higher margins.

Brand Domination

In two thirds of their brands McCormick has the #1 market share. In China they have received the highly coveted designation of famous brand status given by the Chinese government to only 105 brands. The brand loyalty that the company engenders is based on generations of home cooks seeing the red white and blue tins in their pantries. In the mid-Atlantic Old Bay spice is as widely used as ketchup to flavor foods, including fries and potato chips. Also, in the Americas, McCormick is gaining traction in the Hispanic community.

In their markets McCormick has little competition except from private label but as the company expands its roster H.J.Heinz Company (NYSE: HNZ), Kraft Foods Group Inc (NASDAQ: KRFT), and Unilever plc (NYSE: UL) will loom larger as eventually brands will overlap. Kraft just debuted a seasoned cheese and breadcrumb mix for cooking meat and chicken so the game is afoot. These companies will also be competing with McCormick on acquisitions especially in the emerging markets. Kraft has also been a savvy and nimble acquirer snapping up Cadbury right from under Hershey's nose. Kraft's international spin-off Mondelez International Inc (NASDAQ: MDLZ) is likely to be a hard negotiator with its CEO Irene Rosenfeld the one responsible for the Cadbury buy.

Mondelez is the real competition as a stock with a 13.98 P/E and a 4.50% yield but it doesn't have the track record yet as a publicly traded stock that would reassure investors who are looking for a dependable yield.

Yield To Passion?

Do you buy a "Passion for Flavor"? Analysts see growth at high single digits but they're underestimating the global food trend toward spicier food and variety. The P/E is higher than one would like and the company does have debt they're taken on to acquire accretive brands. But this stable name has a sizzling vision for food globally and that consistently raised dividend, well, that's just gravy.

leglamp has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend H.J. Heinz Company, McCormick & Company, and Unilever. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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