What happened
Shares of spice specialist McCormick & Company (MKC 0.97%) gained 12% in March, according to data provided by S&P Global Market Intelligence. The company reported financial results that were stronger than expected, which led to the strong performance for the stock during the month. However, it’s still facing some challenges that will be hard to overcome in 2023, as we’ll see.
So what
McCormick stock performed in line with the S&P 500 until it reported financial results for the first quarter of its fiscal 2023 on March 28. Year-over-year sales growth of 3% in the quarter was better than Wall Street had expected. And it was better than the 1% year-over-year growth it had in its fiscal 2022.
However, McCormick is still working through some challenges. Higher costs have led to a deterioration of its gross profit margin. For perspective, the company has averaged a gross margin of about 40% over the past decade. But its gross margin fell below 36% in fiscal 2022.
It seems that the market was nevertheless pleased with McCormick’s first-quarter gross margin of 36%, since it showed relative improvement from fiscal 2022. But it remains well below its historical average, illustrated below.
MKC gross profit margin (quarterly) data by YCharts.
Now what
Investors also seemed encouraged that management reaffirmed its guidance for fiscal 2023. It expects 5% to 7% year-over-year sales growth and operating income to increase by 10% to 12%.
But it’s important to note that lower gross profit coupled with higher operating expenses means that McCormick’s operating income will still be down, even if it enjoys double-digit growth in the coming year. The company had over $1 billion in operating income in its fiscal 2021. But management’s guidance implies fiscal 2023 operating income of $967 million at best.
Investors are also looking forward to the upcoming dividend. On March 29, management announced an upcoming $0.39-per-share dividend, payable April 24 to shareholders of record on April 10.
For investors wondering what to do with McCormick stock now, I personally don’t believe it’s a compelling buying opportunity. Sales growth is modest. Its operating income is poised to rebound somewhat, but the stock already trades at 23 times its forward operating income, which is pricey for a low-growth business.
Some investors might be interested in buying McCormick stock because its dividend is so consistent: It has paid one for 99 consecutive years. And that motivation is understandable. But with an annualized dividend of $1.56 per share, its yield is only 1.8% at the current price. And the most recent dividend increase was only a 5% bump.
You might not find companies as consistent and resilient as McCormick — spices and seasoning won’t be disrupted. However, there are dividend stocks that offer comparable yields and above-average opportunity at dividend growth. Unless the stock’s valuation becomes more attractive in the coming months, this could make other dividend stocks better buys now.