Week #10MKC
Stock of the Week #10 — McCormick (MKC)
92Five-box test: ✓ Pays · ✓ Raises · ✓ Safe · ✓ Undervalued · ✓ Yield that matters
Week ten, another $100, and this week we're buying the company that made almost everything on your spice rack.
So far we've owned a rural retailer (Tractor Supply), a medical-device maker (Medtronic), a landlord (Realty Income), a utility (NextEra), a snack giant (PepsiCo), the payroll company (ADP), a home-improvement Aristocrat (Lowe's), an asset manager (T. Rowe Price), and a sneaker brand (Nike). This week we buy McCormick (MKC), the world's biggest spice company, and it earns the highest score we've handed out in ten weeks.
Why McCormick
Go look in your kitchen. The black pepper, the garlic powder, the taco seasoning, the Old Bay, the vanilla extract. There's a good chance McCormick made most of it, and a decent chance it also made the store-brand version sitting next to it on the shelf.
That's the business. McCormick holds about 17% of the entire $17.5 billion global spice and herb market, roughly four times the next-biggest branded competitor. It sells to you at the grocery store, and it sells flavorings to the food companies and restaurant chains that make everything else you eat. Morningstar calls that a "wide moat," their term for a durable competitive advantage they expect to last decades.
It has also raised its dividend for about 40 years in a row, through recessions, inflation, and a pandemic. That makes it a Dividend Aristocrat, our shorthand for a company with at least 25 straight years of increases.
The five boxes
- Pays: yes, decades of uninterrupted payments and never a cut.
- Raises: roughly 40 straight years of increases. A Dividend Aristocrat.
- Safe: about 65% of earnings paid out. Comfortably covered, with room to keep growing.
- Undervalued: today's yield sits about 66% above its own 5-year average (with a caveat we'll get to, because we don't like that number as much as it looks).
- Yield that matters: 3.50%.
Five boxes, five checks, for a DividendAbundance Score of 92 — Exceptional. That's the first time in ten weeks we've cleared 90. Our previous best was 88.
So why is it cheap? A $44.8 billion bet.
Here's the whole story in one sentence: McCormick has agreed to buy Unilever's food brands, including Hellmann's mayonnaise and Knorr, for $44.8 billion, in a deal expected to close in mid-2027.
That is not a bolt-on acquisition. McCormick does about $6.8 billion in annual sales. It is buying a business that does roughly $15 billion. The combined company will be around $20 billion in sales, meaning McCormick is swallowing something more than twice its own size.
The market does not love this, and that's why we can buy it at this price.
The case for the deal is real. Those Unilever brands carry operating margins in the low 20s, better than McCormick's own historical mid-teens. Management is targeting $600 million in annual cost savings, which Morningstar considers achievable, since it's only about 4% of the combined company's costs. Unilever will keep roughly 10% ownership plus board and executive seats, which should make the handoff smoother than a cold acquisition.
And on the question everyone asks about food companies right now, the weight-loss drugs: Morningstar argues McCormick is unusually well positioned, because spices and seasonings are what you buy when you're cooking vegetables and protein at home. If eating habits get healthier, the spice aisle is not the part of the grocery store that suffers.
The honest part, and this week it's a big one
We're not going to soft-pedal this. You are not just buying a spice company. You are buying a bet that a spice company can digest a business twice its size.
Here's what that means in plain terms:
- Debt goes way up. Within a year of closing, McCormick's borrowing is expected to reach about four and a half times its annual earnings before interest and other charges. That's a heavy load. Management has a good history of paying debt down, and the plan is to get back to a comfortable level in three to five years, but that's a plan, not a fact.
- You'll own a smaller slice. McCormick has to issue an enormous number of new shares to pay for this. The share count roughly triples in Morningstar's forecast. Their March note put it bluntly: existing McCormick shareholders "would lose control in a combination."
- The analysts marked it down, not up. When Morningstar folded the deal into their math, they cut their estimate of what McCormick is worth, from $68 a share to $65. They also flag their uncertainty rating as High, specifically because of integration and financing risk.
- Big mergers go wrong all the time. Morningstar's own words: "significant integration risk," and the sheer size "suggests this could prove a more fraught marriage."
- The company you buy today isn't the one you'll own in 2028.
So why did we buy it anyway? Because of the one number that matters most to this portfolio: Morningstar expects the dividend to keep rising right through all of it. Their forecast has the payout going up every single year through 2030, from about $1.97 a share this year to $2.63, while staying near 60% of earnings the whole way. They also expect the wide moat to survive the deal intact. We're being paid 3.5%, growing around 7% a year, to sit through the integration.
One more piece of honesty, about our own scorecard
That "66% above its 5-year average yield" number earned a perfect 20 in our Undervalued box, and we want to flag that it flatters McCormick a little.
The reason is that the 5-year window includes 2021 and 2022, when McCormick was genuinely expensive. Measuring today's cheapness against an inflated past makes the discount look bigger than it is. A fairer read: Morningstar's fair value estimate is $65, and we paid $54.86, so we bought at about 84% of what they think it's worth. That's a real discount, roughly 16%, but it's a normal-sized one, not the enormous bargain the raw number suggests.
Compare it to Nike last week, which we bought at less than half of its estimated worth. Similar scores, very different margins of safety. We'd rather tell you that than let a big number sit there unexplained.
While we're being transparent: the first data we pulled on McCormick reported its earnings as roughly double what they actually are, which would have made the dividend look far safer than it is and pushed the score to 96. We caught it by checking the report against management's own guidance. It's a good reminder that we verify every figure before we buy, and that you should too.
The numbers on this week's buy
- Invested: $100.00
- Bought: 1.8228 shares at $54.86
- New annual dividend income added: about $3.50 per year
- Every dividend flows into the next pick, so the income keeps compounding between buys.
One note on the spread: McCormick is our second consumer-staples name alongside PepsiCo. We'd have preferred something in materials, technology, or energy this week, and we looked hard at two candidates in those lanes. Neither passed. A chemical company was paying out 87% of its earnings with dividend growth that had slowed to about 1% a year, and a California utility was cheap only because a fire report landed two weeks earlier. Sometimes the discipline means taking the best real bargain on the board instead of the one that fits the diagram.
Ten weeks in, ten businesses, and this week our highest-scoring pick yet, bought with our biggest asterisk yet. The running totals are on the portfolio page, and the slider lets you drag through time to watch the income grow.
That's week ten. We bought a wide-moat Aristocrat at a fair discount, and told you exactly what could go wrong with it. See you next week for pick number eleven.
This is not financial advice. We're individual investors sharing our own approach and the reasoning behind our own real decisions, not licensed advisors. We own, or are buying, the stocks we write about in this series. Do your own research and consider speaking with a financial professional before investing. Dividend figures, yields, share counts, and prices are accurate to the best of our knowledge as of the publish date and will change over time.