When we talk about investing in US-listed companies, the first companies that come to mind are the top technology companies including Apple, Alphabet (or Google), Amazon, Facebook, and Microsoft.

Today, I would like to share my analysis of a non-technology company – and that company is McCormick & Company Inc. (NYSE:MKC).

I’m pretty sure you are no stranger to this company – we can find the company’s spices, seasoning mixes, and condiments sitting on supermarket shelves, or even on restaurant tables (particular those that serve western cuisine.)

In my personal opinion, its business (where it manufactures, markets, and distributes spices, seasoning mixes, condiments, and other food flavourings to the entire food industry – including retailers, food manufacturers, and foodservice business) is a defensive one as we all need to eat regardless of how the economic situation is. Even in the face of the ongoing Covid-19 pandemic, where many countries implemented lockdowns to a certain degree to control the community spread of the virus, supermarkets have remained opened throughout (as it is deemed to be operating in an essential business), along with those in the food and beverage industry (albeit only for takeaway) – in both industries, McCormick & Company Inc.’s products can be found.

Currently, the company’s products can be found in 150 countries and territories, and they are a global leader in the flavouring business.

Having said that, is the company one to add to your long-term investment portfolio? In this post, let us take a look at its historical financial performance, debt profile, and dividend payout over the past 5 years (between FY2015 and FY2019), its financial performance so far this year (compared to the previous year), and also whether or not the company’s current share price is priced at a discount or at a premium (based on its current vs. its historical valuations:

Historical Financial Performance of McCormick & Company Inc. between FY2015 and FY2019

The company has a financial year-end on 30 November.

In this section, let us take a look at its historical financial performance over the past 5 years, between FY2015 and FY2019:

Total Revenue and Net Profit (US$’mil):

	FY2015	FY2016	FY2017	FY2018	FY2019
Total Revenue (US$’mil)	$4,296m	$4,416m	$4,730m	$5,303m	$5,347m
Net Profit (US$’mil)	$402m	$472m	$477m	$933m	$703m

The company’s total revenue grew from US$4,296m in FY2015 to US$5,347m in FY2019, with improvements recorded every single year, as well as a compound annual growth rate (or CAGR) of 4.5% over a 5-year period.

Its net profit too, recorded year-on-year (y-o-y) increase every single year except for the latest FY2019, as a result of expenses incurred by the company to reduce fixed costs, simplify/improve processes, and improve the company’s effectiveness – regardless, its CAGR still grew by 11.8% over a 5-year period.

Gross and Net Profit Margin (%):

The following is McCormick & Company Inc.’s gross and net profit margins over a 5-year period which I have calculated:

	FY2015	FY2016	FY2017	FY2018	FY2019
Gross Profit Margin (%)	40.4%	41.5%	37.9%	39.5%	40.1%
Net Profit Margin (%)	9.3%	10.7%	10.1%	17.6%	13.1%

Apart from a y-o-y drop in FY2017, McCormick & Company Inc.’s gross profit margin saw improvements in the remaining four financial years I have looked at.

Its net profit margin, however, have fluctuated over the years.

Return on Equity (%):

In layman terms, Return on Equity, or RoE, is the measure of a company’s profitability (in percentage terms) for every dollar of shareholders’ money it uses in its businesses. For instance, if the company’s RoE is 15.0%, it means the company is able to generate $15 of profit for every $100 of shareholders’ money it uses.

With that, let us take a look at McCormick & Company Inc.’s RoE I’ve computed:

	FY2015	FY2016	FY2017	FY2018	FY2019
Return on Equity (%)	24.0%	29.0%	18.6%	29.4%	20.4%

Just like the company’s net profit margin, its RoE have also fluctuated over the past 5 financial years.

McCormick & Company Inc.’s Debt Profile between FY2015 and FY2019

Apart from studying a company’s financial results, another area I look at is the company’s debt profile – my preference is towards companies with very little or no debt as well as one that is in a net cash position.

Let us take a look at McCormick & Company Inc.’s debt profile over the years – where I seek to find out whether or not the company is in a net cash/debt position, along with its current ratio (if it is above 1.0, it means the company is able to fulfil its short-term debt obligations – meaning those that are due within a year):

	FY2015	FY2016	FY2017	FY2018	FY2019
Cash & Cash Equivalents at the End of Period (US$’mil)	$113m	$118m	$187m	$97m	$155m
Total Borrowings (US$’mil)	$1,191m	$1,444m	$4,702m	$4,603m	$4,227m
Net Cash/ Debt (US$’mil)	-$1,078m	-$1,326m	-$4,515m	-$4,516m	-$4,071m
Current Ratio	1.1	1.0	0.8	0.7	0.7

In my personal opinion, the company’s debt profile is not exactly one I am very comfortable with – not only is the company in a net debt position in all of the 5 financial years I have looked at, its current ratio have also slipped below 1.0 between FY2017 and FY2019.

The only positive (if I can call that as one) is that, its total borrowings have come down since peaking at US$4,702m in FY2017.

Dividend Payout by McCormick & Company Inc. between FY2015 and FY2019

The company declares a payout to its shareholders on a quarterly basis – however, as a Singaporean investing in US-listed companies, take note that all dividends received are subjected to a 30.0% withholding tax (meaning the amount of dividends you receive in your account are 30.0% less than what is reported.)

With that, let us look at McCormick & Company Inc.’s dividend payout over a 5-year period, along with its dividend payout ratio:

	FY2015	FY2016	FY2017	FY2018	FY2019
Dividend Per Share (US$/share)	$1.63	$1.76	$1.93	$2.13	$2.33
Dividend Payout Ratio (%)	52.4%	47.7%	51.9%	30.4%	44.5%

McCormick & Company Inc. have been increasing its dividend payout to its shareholders over the past five financial years – where its payout increased from US$1.63/share in FY2015 to US$2.33/share in FY2019 – a CAGR of 7.4%.

Looking at its dividend payout ratio over the years, it seems that the company pays out about 50.0% of its earnings as dividends to its shareholders.

Moving forward, I am of the opinion that the company should be able to further increase its dividend payout if it continues to record improvements in its earnings.

McCormick & Company Inc.’s Performances in 1H FY2020 (vs. 1H FY2019)

At the time of writing, I only have the company’s results as at 1H FY2020 ended 31 May 2020 (the period under review was between 01 December 2019 and 31 May 2020.) I will be comparing its latest results against results recorded in the same period last year (i.e. 1H FY2019 ended 31 May 2019):

	1H FY2019	1H FY2020	% Variance
Total Revenue (US$’mil)	$2,533m	$2,613m	+3.1%
Net Profit (US$’mil)	$297m	$341m	+14.5%
Gross Profit Margin (%)	38.5%	40.2%
Net Profit Margin (%)	11.7%	13.0%
Cash & Cash Equivalents at the End of Period (US$’mil)	$139m	$185m	+32.7%
Total Borrowings (US$’mil)	$4,671m	$4,287m	-8.2%
Net Cash/ Debt (US$’mil)	-$4,531m	$4,102m
Dividend Per Share (US$/share)	$1.14	$1.24	+8.5%

My Observations:

• Both its total revenue and net profit were up 3.1% and 14.5% on a y-o-y basis respectively, due to increase in sales of its product offerings as consumers spend more time cooking at home amid the pandemic.
• In the same time period, its gross profit margin went up by 1.7 percentage points (pp), while its net profit margin improved by 1.3pp.
• Looking at its debt profile, due to an increase in its cash and cash equivalents, as well as a decrease in its total borrowings, while the company is still in a net debt position, but it saw a slight improvement compared to the same period last year.
• Finally, as a result of the company increasing its quarterly dividend payout to US$0.62/share in the current financial year (from US$0.51/share in FY2019), its total dividend per share payout for 1H FY2020 saw an 8.5% y-o-y improvement.

Overall, it has been a good first half of the financial year for McCormick & Company Inc. in my personal opinion, and I expect the remaining quarters of FY2020 to record y-o-y improvements.

Is McCormick & Company Inc.’s Current Share Price Considered Cheap or Expensive?

To find out whether or not a company’s share price is considered cheap or expensive, I always take its current valuations (computed based on its current share price), and compare against its average.

As at 04 September 2020, McCormick & Company Inc.’s share price was at US$199.34, and as such, its current valuations is as follows:

P/E ratio: 35.6
P/B ratio: 7.3
Dividend Yield: 1.2% (computed based on US$2.33/share of dividend payout in FY2019)

The following table is McCormick & Company Inc.’s 5-year average valuations:

	FY2015	FY2016	FY2017	FY2018	FY2019	Average
P/E Ratio	27.9	24.7	27.5	21.4	32.3	26.8
P/B Ratio	6.6	7.0	5.2	6.2	6.5	6.3
Dividend Yield	1.9%	1.9%	1.9%	1.4%	1.4%	1.7%

Comparing its current vs. its 5-year average valuations, it seems that at its current share price, McCormick & Company Inc. is currently trading at a premium due to its higher-than-average current P/E and P/B ratios, along with a lower-than-average current dividend yield.

In Conclusion

There are some aspects about the company I fancy (its growing top- and bottom-line, along with its increasing dividend payout over the years), and some I am not too comfortable with (such as its current ratio falling below 1.0 since FY2017.)

So far, its financial results in 1H FY2020 have been a good one – with the company benefiting from consumers cooking from home more often amid the ongoing Covid-19 pandemic.

However, despite having said that, this post is by no means a recommendation to buy or sell shares of McCormick & Company Inc. Please do your own due diligence before you make any investment decisions.

Disclaimer: At the time of writing, I am not a shareholder of McCormick & Company Inc.

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