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McCormick (MKC) Part II - Giving Food Its Flavor

by Alex Mason | Oct 7, 2020 | Companies, Episodes | 0 comments

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Mental Details
  • In the modern era, McCormick is one of those companies that focuses on selling spices, seasonings, and related products like French’s Mustard and Cholula Hot Sauce. They sell to both businesses and everyday consumers like you and me. Not to mention, they sell in over 160 countries across the globe!
  • In today's episode we cover the business model and financials of McCormick & Co., as well as putting everything together to synthesize what we’ve learned about the business.

Transcript:

  • Alex Mason: Last week, we talked about the spice giant McCormick, and we looked at the history of not just the company, but also the spice industry as a whole today, we're going to continue our journey with McCormick, looking at their present day operations, how their business functions, as well as their financials.
  • [00:00:18] And then we're going to wrap up with a synthesis and kind of putting together all the information we've learned to understand what the investment case is. I'm Alex Mason, host of Stock Stories. This is the podcast where we decode investing principles by analyzing the business behind the stock, as well as learning about mental models in order to help you become a better investor.
  • [00:00:42] You ready? Let's go.
  • [00:01:14] Welcome to the show. This is the Stock Stories podcast. My name is Alex Mason, your host and stock storyteller. Thank you for joining me. I appreciate you taking the time to listen and yeah, I'm just really grateful for your listenership and helping make this show possible because without you. You know, the show just wouldn't be what it is.
  • [00:01:36] So I appreciate you listening each and every week, following the show, sharing the show rating and reviewing the show, everything that you do to help me make the show grow. And so I want to first off and say, I appreciate that very much. If you're new to the show, this is the show where we decode investment principles by looking at the business behind the stock.
  • [00:01:59] And that is exactly what we're doing today. Last week, we looked at McCormick focused on the history today. We're going to focus on the present day. What is the business like today? And this is such an interesting company to be because it's not. Technically is not a food company, right. They don't actually sell food.
  • [00:02:18] Like so many of the other companies we've studied on the show so far. They study food flavorings, which is this really interesting niche. Something that I think is quite interesting in particular, because you can still get high margins from these types of products, but they're not dependent on any one particular tastes.
  • [00:02:40] Right? If you sell McDonald's hamburgers. You got to have people like burgers pretty much. Right? I mean, how many people buy salads at McDonald's even though they offer them on the menu, right. Or think about Domino's pizza, another company we've covered on this show, you pretty much have to be in the mood.
  • [00:03:00] For bread and cheese, if you, if you're going to order from Domino's, but think about McCormick, maybe you want some kind of flavor that spicy, maybe the next day you want more of a salty kind of taste, or maybe the day after that you want some kind of a garlicky taste on your food. Go. McCormick can satisfy all of those cravings.
  • [00:03:26] So that's just something that I find really interesting. Well, with that being said, we're going to get right into the episode now and talk about McCormick. Let's do it.
  • [00:03:50] All right. Today, we're going to talk about McCormick, ticker symbol, M K C. Today, we'll start with the business overview. So what does McCormick do today? What do they sell? They sell spices, seasonings, condiments, and other types of flavored products. And in fact, they sell in 160 countries worldwide. Now that's virtually the entire earth.
  • [00:04:16] I don't care where you're listening to this from McCormick sells spices, where you are. Isn't that amazing that they have that kind of international reach. There's only a few businesses I've ever studied that I think had that international reach. And I think maybe Coca-Cola is the only one that's coming to mind at the moment, but 160 countries worldwide, that that's incredible.
  • [00:04:38] And it speaks to the ability to sell a brand or product worldwide. That means that you have to cross so many cultural boundaries. In order to sell your products, but they have done it and they've been doing it for over a century. So I think that alone is pretty amazing. Some of the popular brands that McCormick sells are of course, the McCormick brand.
  • [00:05:03] If you've ever seen the, the blue M and the red C logo, that's the McCormick brand on your seasonings or your salts. They sell French's mustard. They sell Frank's red, hot, hot sauce. They sell Lowery's Cholula is one of their newer brands. And then they sell a lot of other brands. In addition to that, one thing interesting about this business is they sell to the entire food industry.
  • [00:05:30] It's not just to consumers like you and me, although that's really the bulk of their business. They sell to businesses as well. And so that brings us to the two main segments of this business. There's the consumer segment and the flavor solutions segment. Now, consumer that's exactly what it sounds like.
  • [00:05:49] They sell their spices, their seasonings, their sauces directly to people, people like you and me. And an example of that would be through Walmart. You and I could go to a Walmart. Buy some McCormick seasonings. And that's one way that they sell to us. There are other segment is called flavor solutions, and this is where they sell food to businesses.
  • [00:06:14] Now, one example of this is Pepsi, Pepsi co. Now we studied Pepsi-Co on the show in the past. And if you remember, about half of their business comes from the sales of soft drinks of soda, concentrates and syrups. So Pepsi. And all their other, other brands, but the other half of their business is really with snacks.
  • [00:06:37] They're a snack giant too, kind of like Mondelez international is a snack giant, but PepsiCo is really, really into chips. They're into chips. They're the Cheetos. They have lays. Those are the kinds of brands that we know and love from Pepsi that people buy all the time. So half of their business is snacks.
  • 00:06:58] Well guess who helps them flavor? All of those snacks. That's right. McCormick McCormick sells their flavoring solutions to Pepsi. And actually, if we look at these two customers that I mentioned from both sides of the business, Walmart on the consumer side and Pepsi on the flavor solution side. If we combine those two, they both account for about 20% of McCormick's total sales.
  • [00:07:26] So a fifth of their sales actually comes from those two. Big companies. Very interesting. And if we were to break that out specifically, Walmart, they account for 12% and PepsiCo accounts for 11%. So it's actually about 23% of their total sales come from those two companies, which I might be worried about that if Walmart and PepsiCo weren't great businesses, but we've studied them on the podcast before.
  • [00:07:53] So we know they're great businesses. And if you aren't familiar with the details, how Walmart's business works or how PepsiCo's business works. Go ahead and check out episode 41, which is an episode on the show about Pepsi-Co and episode 47, which is an episode about Wal-Mart that's episodes, 41 and 47 to learn more about those businesses.
  • [00:08:19] Now, as far as their international. Business. Now we talked about how they're in 160 countries worldwide. They're basically in every corner of the global economy. Now their sales mix is actually about 60%, 40%. So 60% of their sales come from North America where they're based, they're based in America and 40% comes from countries around the world.
  • [00:08:45] So that's a pretty good amount of international diversification. Now, keep in mind that. We're not talking about volume here. We're not talking about the volume of shipments of coriander and saffron and peppercorn. We're talking about dollars. And as far as dollars coming from all these currencies around the world, we also have to keep in mind that currency values, fluctuate relative to each other.
  • [00:09:11] So the us dollar might be stronger. Or weaker than the British pound, for example. So we have to kind of account for that. And so even though the 60 40 split makes it look like America or the Americas has the dominant positioning, as far as sales volume, it's really just sales dollars. Because we haven't accounted for like currency translations.
  • [00:09:35] So currency say something is sold in Australia. Say someone buys a canister assaults in Australia. Well, McCormick would get that money in Australian dollars, but then they would translate it into us dollars before reporting it in their annual report. And there's more details on this too. If you were to look at the 10 K itself, you would see there's often numbers reported by management for.
  • [00:10:02] Currency that's converted and currency. That's not converted. So you and I, as investors, we could see how much a particular region they don't usually break it down by country specifically, but a particular region of the world. In constant currency terms, that's the term for it? Constant currency or translated back into us dollars.
  • [00:10:24] So we got about a 60, 40 split, which is pretty good, essentially. That means that they're pretty well diversified internationally. That's how I interpret that. As far as how sales are split up between the two segments, consumer and flavor solutions. It's also about a 60% 40% split with consumer taking about 60% and flavor solutions taking about 40%.
  • [00:10:49] However, the profit split, that's a different story. That's somewhere around an 80%, 20% split. So the consumer segment of the business actually makes a lot more money for the company. And the reason that is, is because they're able to sell those products at higher margins. Now let's pause and think about this for a moment.
  • [00:11:10] This makes intuitive sense. If we think about packaging size. So if you sell spices or seasonings in bulk, then your customers are going to demand lower prices per pound or per unit, right? Because they're buying a lot more in terms of absolute dollars. Now think about the everyday consumer everyday consumers, won't bat an eye at a package of pink Himalayan, sea salt.
  • [00:11:34] That costs a couple of bucks. Even if the per unit cost to produce that item is significantly lower than the sales price. It just won't matter to the end consumer as much, but if you're buying a couple million pounds of nutmeg for your. Large business. Then you want to decrease your costs as much as possible.
  • [00:11:56] So McCormick is don't make as much margin on those types of purchases, even though they're selling a high volume of different flavors or different seasonings and spices and condiments and things like that. Now look at the beverage industry. Again, check out episode 41 to two, listen to PepsiCo. If you haven't already.
  • [00:12:19] And the beverage industry helps kind of reaffirm this principle. Now looking at Pepsi's major competitor Coca-Cola, they've moved to selling beverages in smaller packaging sizes over the years. And what this has done is has helped combat the gradual decline in soda consumption. While still keeping healthy margins, because if you sell, have you ever seen those little tiny cans of Coke at the store?
  • [00:12:45] I know. I certainly have, well, back in the day, those didn't exist. Say in the nineties or two thousands, you just have these big two-liter bottles or maybe a one liter bottle of soda. Well, people don't want to drink that much soda anymore generally, but they still want it and they still buy it. They just want to buy it in smaller packages because maybe they're health conscious or.
  • [00:13:06] Maybe cost-conscious so people are willing to pay it more on a per unit basis if things are packaged a little smaller too. So just, just a note on that and why I think that that 80 20 split in profit exists between the two business segments. Now looking at some of the acquisitions, the big acquisition really in recent history for McCormick was in 2017.
  • [00:13:34] And that was of a company called Reckitt Benckiser Reckitt bank answer their food division. So I'll just call them RB foods. They bought out that division. For over $4.2 billion. And this was a big deal because not just the size of the acquisition itself, but Reckitt Benckiser, they are known for some really famous brands and McCormick actually bought.
  • [00:14:00] Some of those brands, they bought the French's mustard division and the Frank's red hot division. And I know just from my personal experience as a consumer, like those are really popular brands. Those are what you would call name, brand condiments. If you go to the store. Matter of fact, I was in target last night, walking through the aisle and of course McCormick was on my mind.
  • [00:14:23] So I got to go through the spice style, got to go through the condiment aisle. And what do I see right there in the middle of the shelf is Frank's red, hot, hot sauce. Frank's red, hot, hot sauce. And one thing to pay attention to you. Next time you go to the grocery store. If you want to learn more about food stocks or beverage stocks, just go to the grocery store and just take a look at what's there.
  • [00:14:47] And it looks like there's an incredible amount of variety. And as far as the actual thing that you're tasting or eating, yeah, there is a lot of variety, but as far as the companies behind all of these items, a single aisle may be dominated by three companies, three players. If you really look at the products behind.
  • [00:15:28] Is shelf positioning. This is very important in retail. Have you ever noticed that when you go to the store, sometimes you'll just the first thing you see, you just grab it and then you just leave because it satisfies your immediate need for that item. And you don't really spend a super long amount of time looking for the best deal, or maybe you're looking for a particular flavor and you just grab what you see.
  • [00:15:53] Right? Well, there is a very important psychological principle. Behind this, if you're looking at the shelf space, you're going to more likely than not to pick what's somewhere in the middle, on the shelf. You might not reach to the top of the shelf. And you're probably almost definitely not going to squat down and get something that's all the way on the bottom shelf.
  • [00:16:18] You're going to pick something that's at eye level, right? You're going to pick something that's at eye level and. When businesses make their agreements with companies like target to sell their goods, like Frank's red, hot, hot sauce, or Coca-Cola beverages. They are agreeing not just to have certain amounts of shelf space, but they're agreeing on the positioning of the shelf space because they know as marketers, if they only have their products on the bottom shelf.
  • [00:16:54] That they're not going to sell as many products because is you and I are just not going to squat down and we're not going to tilt her head down and stare at what's being sold all the way on the bottom shelf, unless maybe we're really price conscious and we want the knockoff brand. Well, there's a reason for that.
  • [00:17:12] And that's because you sell more products. When you sell them at eye level, you sell more products when. You have attractive packaging, there's all sorts of things that go into it. So just notice that next time you go get your groceries and you'll see that difference. You'll see that difference. Some of the most popular brands they're kind of right in that middle band between slightly above eye level, just slightly below eye level.
  • [00:17:35] And of course the average person's height. I don't know what the average person's height is. It may be maybe different in your country. But I think over here in America, it's probably somewhere around maybe five, eight, five, nine, somewhere around there. And, and so, yeah, so you're just going to see things, see certain brands around that height.
  • [00:17:55] And I noticed in this target yesterday that Frank's red hot is right there in the middle right there in the middle. So that means that they understand the power of marketing. And I just wanted to make that aside because I think it's so powerful. So they bought the Frank's red hot brands and the French's mustard brands from break at Beggs Brancaster in 2017, it was a big deal.
  • [00:18:19] And I think that that's been working out for them. McCormack has a long history of acquisitions dating all the way back to the early 19 hundreds. They started buying other businesses and they've been doing it ever since. And so they have this good history of being able to continually make more and more money due to their acquisitions.
  • [00:18:39] Now half of the consumer sales in that segment of the business are related to spices, herbs and seasonings. While the other half are things like condiments and sauces. And the company has actually been moving into condiments and sauces more in the past two or three decades than I initially thought when I was looking through the history of McCormick, I kind of expected them to only be a spice and herb company.
  • [00:19:03] Cause that's what I think of when I think of them. But really they have been not just dabbling, but really selling in this area of sauces and condiments for a while. They just happened to acquire some of these bigger brands in recent years. So 2017, that was, you know, four years ago at the time of this recording.
  • [00:19:23] Now this is a business that relies on commodities. So raw materials are really important. And these are things that come out of the ground, right. Or are generated maybe on a farm things like dairy things like peppercorns, which makes pepper things like vanilla, vanilla comes from a plants. Capsicums capsicums are things like red peppers and paprika as well as garlic onion.
  • [00:19:53] Rice is one of their key ingredients and we, flour is one of their key ingredients. So all these things that come from the earth, these are the raw materials that allow them to create these spices and these seasonings. And so for example, we have to think about the supply and demand to if. There's a big supply of capsicums or a garlic and the demand decreases.
  • [00:20:19] Well, they're not going to be able to charge as much for seasonings that are based on those raw materials. So that's just one thing to think about as far as this business is they're kind of taking these commodities and adding value to them by processing them, mixing them up in different ways and then packaging them.
  • [00:20:37] And that's basically what McCormick does. Now let's take a look at the financials. It's always great to look at the numbers of the business because the numbers they have to work, the business can be great qualitatively from many different angles, but it has to actually make money. So let's take a look at the financials here and for the sake of comparison and the fact that this is an audio podcast, I'm not going to bore you to death with too many numbers, but I do want to mention a few and we're going to be looking specifically at the years, 2013 and 2020, the fiscal years for 2020 just came out.
  • [00:21:16] And so we're to be comparing this seven year period first, let's look at the sales, the income statement. The sales are what drive the business. If you don't make sales, you don't have a business. In 2013, McCormick made just over $4 billion in sales. And by 2020, it was over five and a half billion dollars in sales.
  • [00:21:37] So that's a growth rate of about four and a half percent. So kind of slow growth there. But very consistent growth. As far as their costs. One thing I wanted to look at was what is the major cost of a business like this? And it is the raw materials. It is the things that I just mentioned, like the rice and the wheat flour and the garlic and the capsicums.
  • [00:21:58] Those are the main costs of the business. So this would fall under the line item. If you were to look at the income statement and the annual report, you would see a term called cost of goods, sold C O G S. And that basically means what are the materials that they need to buy in order to make this business happen.
  • [00:22:17] And if we look at those costs, because they're the biggest cost of this business, they increased from about two and a half billion to just over 3 billion in 2020. And that's right about a four and a half percent growth rate. So their sales and their primary costs are growing in tandem. And neither one is outrunning.
  • [00:22:34] The other, which tells me that their margins are pretty consistent. It means that they're able to make roughly the same amount of money as they have been able to in the past per units. But they have obviously increased their prices along the way and sold and more people. Now, this is all well and good, but what about the profits?
  • [00:22:54] How much profit does McCormick make? In 2013, they made just under $400 million in profits. And in 2020, that number was almost three quarters of a billion dollars. So over 740 million, and that's a 10% annual growth rate in income. So, boom, there, you have it four and a half percent sales growth, but their profits have been grown actually faster.
  • [00:23:21] We actually got to double digit profit growth, which I think is super impressive considering that the sales growth is only four and a half percent. I mean, if you're cranking out profit growth of double digits, hats off to you because you're controlling your costs pretty well. Now this translates into earnings per share, too.
  • [00:23:38] If we look at the earnings per share, it went from a dollar and 46 cents in 2013. So $2 and 78 cents in 2020. So earnings per share. Remember that is the profit per share. That is the amount of money that you and I would see as owners, if all of the profits were distributed to owners and nothing was reinvested in the business, that's what you and I would see as investors.
  • [00:24:02] So if we owned one share, we would get $2 and 78 cents in profit. If we owned a hundred shares, we would get $278 in profit. So always look at the earnings per share figures. Now, this is also a 10% growth rate, which means that the profit growth of the business is actually getting translated into the hands of the shareholders, not significant dilution here.
  • [00:24:25] And this is great. This is great. So 10% annual growth rate in earnings per share. I think that's very solid for a business like this. I mean, for a business that's over a century, year old, still growing profits at 10%. I mean, that's pretty strong. That gives to me, that's a signal of a strong business. As far as the balance sheet, let's look at the cash position.
  • [00:24:46] How much casts did his business have? Well, several years ago, they had only about $60 million in cash, not a lot. And in 2020 though, they had over 400 million. So they really beat up that cash balance. I suspect part of this is due to the effects of COVID, but also in general, they just have money. So they save some of it and they're able to keep more in cash balances as far as their debt goes, their long-term debt.
  • [00:25:14] They've increased the debt a lot, which not surprising. I pretty much say that with every balance sheet that I study these days with interest rates being so low businesses are just taking out more and more loans because the interest cost is low, lower than it has ever been before. And we're pretty much the all time lows with interest rates, not just in the us, but around the world too.
  • [00:25:37] So this is. Not surprising that companies are taking out more debt to fund their operations, but how they use that debt is a different story. And various, depending on the skill and temperance of the managements. Now, as far as McCormick is concerned, they had a billion in longterm debt in 2013 and just under 4 billion in debt in 2020.
  • [00:25:59] So they really did increase that, that balance, but. You know, it's, it really isn't too much. If we look at the net income. So as far as the number of dollars, the businesses making, they're making three quarters of a billion dollars each year. So $3.7 billion in long-term debt. Yeah. There's a decent amount, but you could pay that off with a few years of profits.
  • [00:26:23] That's not super crazy. It's not super crazy. Not like some of the businesses that we've studied. As far as the cash flow statement, let's look at that. As a reminder of the cashflow statement, it tells us how much money is flowing in and out of the business and operating cashflow. That's how much money the business itself is generating how much cash is actually coming into the doors of the company's treasury because of their operations.
  • [00:26:54] While in 2013, this number was just under half a billion dollars. And in 2020, it was just about $1 billion and that's basically doubling. So that's about 11 and a half percent growth rate and operating cashflow, which I think is pretty healthy. And then as far as investing cashflow, this fluctuates from year to year, this past year, it was a billion dollars coming in, in investment flow.
  • [00:27:22] And then financing cashflow was about, it's been around $200 million over the years, maybe a little more. And so that means that depending on the situation, depending on the year, if there's acquisitions, they usually raise money as far as debt in order to finance those acquisitions. Whereas when they paid down debt or they do things like pay dividends or buy back stock, that's going to be financing cashflow going out of the business.
  • [00:27:49] So nothing too big as far as trends here. Now let's take a look for a moment at the dividends. Dividends are an important aspect of shareholder return for this business. They're very mature. They're an older business and like most older American businesses, they pay dividends in 2013, the company spent $180 million on dividends and 2020, that number increased to 330 million.
  • [00:28:14] So pretty good increase in the dividend payout there. If we were to look at it on a per share basis, remember earnings per share. So we can look at dividends per share as well. The dividend per share has grown at about 10% annually. And this is great because the actual payouts to shareholders that growth is mirroring almost exactly the payouts.
  • [00:28:37] Of profit to shareholders, or I shouldn't say payout of profit because the company retains some of their profit, but just the profit per share in general is increasing at the same growth rate. Now, what we often find is management increasing the dividend super fast, more so than the earnings per share growth is increasing.
  • [00:28:59] And that's that's okay in the short or medium term, but in the longterm it's bad because that means over time. The dividend is going to take up all the profits and you need some money to reinvest in your business to grow, right? So we don't want that to happen. We want overall a good balance between the dividends being paid out to us and the total profit that the business is generating.
  • [00:29:23] So I really liked the fact that management has just been very consistent with how they've grown this dividend in line with the profit growth of the business. As far as the shares outstanding. I wouldn't even really mention the number, cause it's not that consequential, I think, to you as the individual investor, but just know that this is a company that has stock splits.
  • [00:29:45] And in the past, over years they had a stock split, the number of shares doubled and yeah, that, that just tells you that they wanted to split their stock. Nothing too important there. One thing I wanted to mention that I think is important. I was going through this annual report and I came across this concept that was new to me.
  • [00:30:03] And I decided, you know what, I'm going to study this. I'm going to read it. And I'm going to share this with you because I think it's important. And it's a concept I've never come across before and I want to help you learn more. And of course, as I learned something, I'm going to share it with you. So this is a concept called cash conversion cycle.
  • [00:30:23] CCC. Well, what is a cast conversion cycle and why do we care about it? Cash conversion cycle is the time that it takes to convert cash deployed in raw materials or resources into accounts receivables. Let me repeat that. It's the time that it takes to convert cash deployed in raw materials or receivables into accounts receivables.
  • [00:30:50] Let's break that down a little bit. What is ramen zeros and resources? Well, those are the things like the cost of goods sold that we mentioned earlier. The company has to buy certain things, has to spend money in order to make money later. So what is the time it takes between when they spend money and when they get it?
  • [00:31:08] I remember accounts receivable. That's when money comes into the business. So money going out versus money going in. How long does it take within that cycle? And this is measured in terms of days. So that lower the number, the better, because the less days it takes for the company to get money from when it spent money, that's better because that means that it's more quickly able to sell products.
  • [00:31:38] And this number has decreased over time for McCormick and company. From 55 days in 2018 to just 39 days in 2020. So they've been gradually decreasing that length of time. And one thing I was wondering, well, well, how did they achieve this? And management just spells it out right there in the annual report.
  • [00:32:00] They say that they achieved this primarily by extending the length of their payment terms to suppliers. So say they're going to buy some. Peppercorns from a supplier in Asia, and they're going to buy this peppercorn. They're going to process it at their factories and they're going to sell it to consumers all over the world.
  • [00:32:22] Well, instead of paying that supplier in, you know, 55 days now they're able to extend that payment term to maybe 60 days or 70 days. So they're, they, they can pay their supplier at. A little bit longer period of time, they have more leeway. And what that allows them to do is pay them later and be able to recognize the revenue from that transaction a little bit faster, because they're able to actually use the material that they've given them.
  • [00:32:57] You see what I'm saying? So that is something that McCormick has been doing to basically improve the efficiency of their operations. That's the impact to you and I, as an investor is. The business itself has improved this operations because they're able to move the money and materials more quickly. So that's a new concept for me.
  • [00:33:17] I hope you learned more from it as well. Cast conversion cycle.
  • [00:33:24] Let's now talk about the synthesis of the business. Let's put all of these things together. Let's think about this business and this potential investment holistically now. So what do we have here? What do we have McCormick? This is what you call an excellent business. This is what you call an excellent business.
  • [00:33:44] My friend, this is a business that provides a lot of qualities that I love to look for in an investment. And I'll go ahead and just name them. It has a highly desired range of products. People want these products, they want seasonings in their food, and that's a desire that hasn't changed for centuries.
  • [00:34:04] They have consistence keyword, consistent sales and profit growth, even over long periods of time. So well over a century, they have diversified cation across product lines. They've got seasonings for all, tastes, condiments and sauces. If you like hot sauce, if you like salt, salty foods, if you like. Cumin nut make anything you want.
  • [00:34:33] They've got it for you. They have little competition at their level of scale. Now I have to look into this a little bit more admittedly, but I think there are only a few other companies that are as big as McCormick in this niche. They have a strong record of returning cash to shareholders and. The evidence for this is that the dividend has increased for 35 years in a row, 35 years in a row.
  • [00:35:00] Can you believe that that's pretty strong record of returning cash to shareholders. And then here's one of the things that most impresses me about McCormick. Now, a lot of people, I won't go on my rants about glamor stocks right now. I will go on my, my little rant on glamor stocks. Let's focus. Let's focus on the business at hand.
  • [00:35:23] So McCormick sells timeless products. McCormick sells timeless products. These are products that are unlikely to be significantly impacted by changing technology. What will Amazon be like 50 years from now? I don't know. What will Apple be like 50 years from now? I don't know. What will McCormick be like 50 years from now?
  • [00:35:52] Probably the same kind of business. They're probably going to be selling the same sea salt peppercorn, saffron, coriander, cumin. Frank's red hat, Cholula, hot sauce. They're probably going to be selling the same things. And so that is something that I think is so powerful. It's kind of like, and since I mentioned Amazon, I'll bring up a Jeff Bezos quote.
  • [00:36:17] He's quoted as saying that what he likes to look for is what is not going to change. What's not going to change in the future. And how do we. Build around that. Well, I don't think that people are going to change their desire for flavorings and spices. So that is another quality of this business that I absolutely love.
  • [00:36:40] And what about the negatives? Of course there has to be some negatives, right? We can't just look at. The positives here. Well, one bad thing about McCormick. They're not growing that fast. They're not growing very fast at all, and I don't expect them to grow fast in the future. Maybe they'll have four to 6% profit growth in the short term, but in the longterm, I think their earnings per share growth should be in the eight to 10% range.
  • [00:37:03] I think that's pretty reasonable for this type of a business. Another thing is the valuation right now. So their dividend yield is about one and a half percent. Definitely not that attractive. If you're a dividend focused investor and the price earnings ratio is around 30, and that is a little bit high.
  • [00:37:23] The stock price, as I'm recording this anyway is around $84 per share. And I think that's a little bit high. I like to see around 20 times earnings to have a better margin of safety, but you know what, I, I might even pay a little bit more because. The earnings quality is so good. And if you hold a high quality business like this for a long period of time, the valuation that you bought it at, it starts to matter a little bit less.
  • [00:37:50] However, because the growth is slower, valuation matters more. So I want to stress that point. You can't just buy a slow growing. Large business like this at 40, 50 times earnings and expect to do well. That's just not going to work out well for you as a, as an investor. So be careful of that. So that's, that's really the major negative is that they grow pretty slowly.
  • [00:38:14] One thing that I do like. Is that management has held back on share repurchases as of late in order to pay off their acquisition costs. Some management teams won't do that. They'll just borrow as much as they can until their bankers tell them that they can't borrow any more money. Now they have mentioned in their annual report that they paid off this RB food acquisition, which they made back in 2017.
  • [00:38:37] I mentioned that earlier and they even paid off the loans early. So that is a great sign. Yeah. They're getting into debt to make these acquisitions, but they're paying off their debt there, meeting their commitments. Now, now that the, yeah, the Fona and Tallulah acquisitions have happened. I expect no share repurchases really in the medium term because I expect them to focus more on paying off debt.
  • [00:39:02] Now I want to end with this taste is one of the five senses. It's one of the five senses and people are willing to pay for good tasting food. The problem is food itself is just not enough. You need flavor to make the experience of eating more enjoyable. Flavor is key. Now this is a stock that I would gladly own at the right price.
  • [00:39:28] If you can get the stock at a decent price, it will probably return a lot for you over long periods of time. And. And that's just because it's a high quality business, but we've got to get the price. Right. Of course. So I really like McCormick. I love their longevity. I love their consistency. I love the niche that they're in and obviously the history I find appealing as well.
  • [00:39:51] So that those are my thoughts on McCormick. I hope you enjoyed this episode as well as the last episode. We'll be talking about history and yeah, I hope you enjoyed it. And that's what I got for you today. And here on Stock Stories, we're looking at the business behind the stock. And next week we will be looking at another company, but that's a story for another day.
  • [00:40:18] Thanks for joining me. I'll see you next time on Stock Stories.
  • [00:40:44] The information presented on Stock Stories is for informational educational and entertainment purposes. Only you and you alone are responsible for your investment and financial decisions. Please consult inappropriate tax legal or financial advisor that analyze your specific situation in the context of your goals and circumstances.

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