Why McCormick & Company Stock Popped Almost 12% Last Month

The company is showing operating leverage despite weak sales.

Shares of seasonings, spices, and sauces business McCormick & Company (MKC -1.71%) popped 11.5% in March, according to data provided by S&P Global Market Intelligence. Most of the gains came on a single day following the company’s financial report for its fiscal first quarter of 2024. Investors were encouraged by its profits despite headwinds for sales.

Indeed, there are headwinds. In Q1 (which ended on Feb. 29), McCormick’s overall sales volume (when adjusted for foreign-currency fluctuations) was down 1% from the prior-year period. Nevertheless, the top-line number rose 3%, thanks in large part to the company charging higher prices for its products.

Higher prices can boost profit margins. Moreover, McCormick’s management has been working to cut costs where it can. The combination of these things resulted in nearly an 18% year-over-year increase in its Q1 operating income, which was encouraging for shareholders.

For fiscal 2024 as a whole, McCormick’s management expects 8% to 10% growth for its operating income, which will take operating income over $1 billion. This was further reason for excitement from investors. And many prominent analysts raised their price targets for McCormick, further supporting its gains during March.

Is this really all that exciting?

McCormick is a boring business — but a good one. Its products are always in demand, which produces consistent financial results that are appealing to a certain class of investors. Not to be too simplistic, but dividend investors generally prefer a high probability of modest upside with a reliable dividend that grows.

McCormick is that. The company just announced its latest quarterly dividend on March 27, marking 100 years without fail of paying a dividend. And it’s raised its dividend for 38 straight years.

In short, McCormick attracts investors who crave consistency and dividend growth. Therefore, the ability to grow operating income despite weak sales is encouraging. It suggests that the dividend is safe and future raises are in the cards.

What’s next for investors?

For its fiscal 2024, McCormick expects sales to be roughly flat year over year. And I’ve already pointed out its ongoing improvements with operating income. Still, growth is modest for this company, which may limit some of its upside in the near term.

That said, by multiple metrics, McCormick stock is trading at a cheaper valuation than its 10-year average. This means that now is an opportune time to pick up shares for investors who crave that aforementioned consistency.

Moreover, when taking a longer-term view, it’s reasonable to expect better days for McCormick’s growth. Right now, consumers are stressed due to inflation. But these macroeconomic issues will ebb and flow over the years, eventually giving way to a better operating environment for McCormick.

Jon Quast 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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