Lately, a steep share price decline has given me an opportunity to buy a dividend stock I have long coveted – and I took it.
At 4.1%, the dividend yield is already well above the FTSE 100 average of 3.1%.
But that yield is actually even more surprising than it first sounds, because this is not a FTSE 100 stock but a US-listed company in the S&P 500 index across the pond. The average S&P 500 yield is a measly 1.1%.
I’ll bet you know it!
That is a very tasty yield.
The yield is not the only tasty thing here – this stock has paid dividends annually for more than a century. It also has a 40-year streak of raising its payout per share annually.
If all of that whets the appetite (as it did mine), you are getting warm to the identity of the company – as it is all about taste! Were I to ask you what jars are in the spice rack of your kitchen, or your friends’ or family’s, you might guess the business I am talking about.
Best known in the UK for its Schwartz brand of seasonings, McCormick & Company (NYSE: MKC) is a multinational food ingredients company that also trades under its eponymous brand in many markets.
I like it – the market doesn’t!
I have eyed McCormick for years because I think its business model is excellent.
Let me explain. Most countries have some demand for packaged spices. Consumers may want a wide range of them, but use many only occasionally.
That could be a headache for supermarkets, if multiple brands sold dozens of different jars of products in small quantities. So in many markets, there are only one or sometimes two branded spice providers, perhaps alongside a supermarket own label product.
With its economies of scale, long expertise, buying networks and blending capabilities, McCormick as market leader commands a strong position from which I do not think it can now easily be dislodged. That gives it pricing power.
Still, if this dividend stock is as great as I think, why has it crashed 32% this year and now sells for less than eight times earnings?
Part of the reason is the double whammy of weakening consumer spending and inflation on some ingredient costs.
Investors fear that could be bad both for revenue and earnings at McCormick. However, both actually rose sharply year-on-year in the first quarter, so this risk is yet to materialise.
Another concern is the impact of McCormick’s planned combination with Unilever’s food business to form a new business, albeit one still called McCormick.
I see a real opportunity here
The logic of that deal is that it gives McCormick more distribution muscle. Maybe it will, but I do have a nagging fear that it will make the investment case for it less attractive.
Currently, its market positioning is unique. Throwing in a bunch of other food brands further could dilute the purity of the spice and flavouring business model that I like so much.
But it is a great business already and I think the current share price looks too cheap, whether or not the Unilever deal delivers as planned.
I have been buying McCormick shares — and hope to hold them for years or even decades.
Should you invest £5,000 in McCormick right now?
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Christopher Ruane owns shares in McCormick & Co.
