Is McCormick a Great Dividend Stock?

Dividend stocks aren't hard to find, given that all of the members of the Dow Jones Industrial Average and three-quarters of the S&P 500 pay out regular disbursements to shareholders.

The challenge is tougher when you're looking for the very best stocks, those that have a high likelihood of paying steadily increasing dividends for decades while providing capital appreciation at the same time.

Below, we'll put spicing and flavorings specialist McCormick (NYSE: MKC) through that test to see whether this consumer staples giant has what it takes to qualify as a great dividend stock.

Spices laid out on a table.

Image source: Getty Images.

The dividend checklist

McCormick's dividend has nearly all of the ingredients that investors look for when they're hunting for quality payouts. That starts with a 33-year streak of dividend increases that easily qualifies the company for Dividend Aristocrat status. The payout has been rising at a robust clip, too, reaching $2.13 per share in fiscal 2018 versus $1.51 per share four years earlier. The last three annual increases were 10%, 10%, and 8%, respectively.

The dividend is easily affordable for the company, too. Last year it amounted to just 30% of earnings, in fact. The roughly $300 million that McCormick pays in dividends is also well covered by cash flow, as operating cash was over $800 million in each of the last two fiscal years. Taken together, these metrics tell investors that McCormick has both the desire and ability to consistently reward shareholders with increasing dividend payments.

The main knock against this dividend is its relatively low yield today. At around 1.4%, McCormick's dividend is below the 1.9% an investor could earn by simply owning an S&P 500 index fund.

The business checklist

It's important not to get too hung up on the dividend metrics and forget that the business is the real factor supporting investor returns. McCormick has a solid track record and outlook on this score, too.

The spice giant routinely outperforms peers in the consumer-packaged foods business, many of which have been struggling for years with subpar growth. While companies like Campbell Soup have seen sales hold at flat or decline slightly, McCormick's organic growth has hovered around 5%. That success is a testament to its dominant brand and marketing position in attractive global niches.

The company has also enjoyed rising profit margins thanks to its recent acquisition of the French's and Frank's condiment brands, combined with aggressive cost-cutting. Operating margin is inching toward 18% of sales in 2019, compared with 15% in 2016 .

Sales growth has slowed in 2019, and the biggest risk for new investors is the potential for that slump to carry over into 2020 and beyond. Management doesn't see that happening, though, and instead points to solid underlying demand trends as supporting more gains in market share ahead. In any case, the company's strengthening profitability could easily fund higher dividend payments even if McCormick struggles to return to its long-term sales growth goal of around 5%.

As a leading business in an attractive niche, boasting a long track record for rewarding shareholders, McCormick seems like a classic example of a great dividend stock. The lower yield is a drawback, sure, but the payout is growing quickly and should continue surging as McCormick gets more profitable. Put it all together, and this stock deserves a spot on your dividend watch list.

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Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool recommends McCormick. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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