The annual dividend payment has increased by 11.40% per year over the past decade, which is higher than the growth in EPS.
An 11% growth in distributions translates into the dividend payment doubling every six and a half years on average. Future dividend growth would have to track growth in earnings per share, and would likely be in the 9%-11% range annually.
The dividend payout ratio increased from 33% in 2003 to almost 48% in 2006, before decreasing to 41% in 2012. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.
The company has a high return on equity, which has decreased slightly over the past decade. This indicator seems to have bottomed out and is on the rebound as of recently. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.
Currently, the McCormick stock is slightly overvalued, as it trades at a P/E of 20.10 and yields only 2.30%. I am analyzing the company because I believe it is quality dividend growth stock, which will be a very good investment on dips below $63, which is equivalent to a P/E of 20 and a current yield above 2.50%.
If the stock price remain around $69 per share however throughout 2014, rising earnings per share would eventually result in a P/E of 20 simply by waiting. A wonderful business like McCormick will compound earnings and dividends for its investors over time, which is why it is frequently overvalued. I always want to have some margin of safety in case things do not turn out as expected, as I try to avoid getting overly excited about any individual security.
I initiated a half position in McCormick after the market dropped on Monday. While entry yield is lower than my criteria of 2.50%, I bought this compounding machine because I believe it will be able to grow and provide sustainable dividend growth in the future. I have also found it helpful to monitor quality companies I am interested in much better, when I have skin in the game. If the stock price keeps sliding down, I will keep adding.
Full Disclosure: Long MKC