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This Dividend Aristocrat Is 21% Off Its Record High: Should You Buy the Dip?

Market volatility can present intriguing buying opportunities to investors with a long-term mindset. With the S&P 500 index 18% off of its 52-week high, there are plenty of stocks out there trading at attractive valuations.

Shares of the seasoning mixes and condiments manufacturer and distributor McCormick (NYSE: MKC) have retreated 21% from their record-high share price of $107 set in April. This raises the following question: Should dividend growth investors pick up shares of the stock?

Let’s dive into McCormick’s fundamentals and valuation to address this question. 

A rare sales and earnings miss

Late last month, McCormick reported its financial results for the second quarter, ended May 31. The company uncharacteristically missed both the analysts’ consensus forecasts.

McCormick recorded $1.5 billion in net sales during the second quarter, which was a 1.3% decline over the year-ago period. This fell just shy of the $1.6 billion in net sales that analysts were expecting. What led the company to come up short of the analysts’ consensus for net sales for just the second quarter out of the past 10 quarters? 

McCormick faced meaningful headwinds. For one, inflationary pressures left consumers with less discretionary income. Second, COVID-19-related restrictions in China resulted in reduced consumption of products for the quarter. Third, the divestiture of a low-margin business in India lowered volumes. These factors each played a role in a 7% year-over-year volume and product mix decline. 

The good news for McCormick is that its leading brands, such as the eponymous McCormick, Cholula hot sauce, and French’s yellow mustard, flexed considerable pricing power in the quarter. This is what allowed the company to generate 7% growth over the year-ago period from pricing actions to offset volume declines. Throwing in unfavorable foreign currency translation of 1% explains the slight drop in total net sales for the quarter. 

McCormick posted $0.48 in non-GAAP diluted earnings per share (EPS) in the second quarter, which was a 30.4% year-over-year decline. This came in well below the $0.65 estimate that analysts were projecting for the quarter. What caused the company to miss analysts’ earnings estimate for only the second time out of the last 10 quarters? 

Cost inflation and supply chain challenges were responsible for a 350-basis point decline in McCormick’s non-GAAP net margin to 8.4% in the second quarter. The other component of the company’s lower adjusted diluted EPS can be traced to a 0.2% increase in its average diluted outstanding share count to 270.5 million for the quarter.

Due to McCormick’s strong brands and a growing global population, analysts are expecting 5.1% annual earnings growth over the next five years. And based on the company’s reputation for beating analyst predictions, this actually seems like a conservative earnings growth outlook, in my opinion. 

Image source: Getty Images.

Solid dividend growth is poised to continue

Having raised its dividend for 36 years straight, McCormick is a Dividend Aristocrat. And it looks like the company isn’t in jeopardy of losing its status as a Dividend Aristocrat anytime soon. 

This is because the stock’s dividend payout ratio is set to be 48.7% for this fiscal year ending in November. For context, this allows McCormick to retain the majority of its earnings to execute acquisitions and repay debt to drive its earnings higher. This is why I believe dividend growth will exceed earnings growth over the next several years, which should lead to high-single-digit annual dividend growth. Paired with a 1.8% dividend yield, this is a nice mix of immediate and future income. 

The company’s valuation isn’t lofty or cheap

Despite a difficult quarter, McCormick is a business that appears to be doing well. Best of all, patient investors finally have a chance to buy in at a rational valuation.

This is evidenced by the fact that McCormick’s Shiller price-to-earnings (P/E) ratio of 32.8 is just above its 10-year median of 32. The Shiller P/E ratio considers the cyclical nature of corporate earnings by accounting for the previous 10 years of earnings data, which is thought to be a complete economic cycle. Since McCormick’s fundamentals look to be intact for the long run, this is hardly an unreasonable valuation for investors with a time horizon of 5 years or more to hold the stock. 

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

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