The stock market keeps hitting new record highs, and we remain in the most unusual of times. Against that market backdrop, unemployment rates are still high, the pandemic is still raging, and many businesses are treading water requiring financial aid.
Investors who think this divergence between Wall Street and Main Street has to end soon may fear a market crash in 2021. The best way to manage fear of a big pullback is typically to set aside any cash you know you'll need in the next three to five years. But if you're looking for an investment to help you ride out troubled times, McCormick (NYSE:MKC) is a company that can withstand a downturn, has several growth catalysts, and still yields more in dividends than you can get from an online savings account.
Image source: Getty Images.
A balanced business
Many people know McCormick's consumer segment, offering spices and sauces that many use at home. It also operates a flavor-solutions group that serves restaurants and packaged-food companies. While the company's flavor-solutions sales have slumped as restaurants and commercial food services customers cut back or shut down during the coronavirus pandemic, its consumer segment picked up the slack.
In the quarter that ended Aug. 31, 2020, flavor-solutions revenue decreased 3% compared to the year-ago period, but McCormick's consumer-segment sales increased 15%. In the first nine months of 2020, the consumer segment grew to 64% of net sales, up from 61% in 2019. The balance from its segments helped allow the company to continue investing in the business through the uncertainty and volatility in 2020.
In October, McCormick announced plans for a new Northeast distribution center. What will be its largest distribution site globally "substantially increases capacity to meet growing demand in the Americas region," the company said in a statement.
Image source: Getty Images.
Catalysts for growth
Part of the growing demand is coming through acquisitions. McCormick bought the popular French's and Frank's RedHot brands with its acquisition of Reckitt Benckiser's food division in August 2017. In November 2020, McCormick bought the parent of Mexican-made hot sauce Cholula for $800 million in cash, adding to its lineup of well-known sauce brands. It is using its brand strength to expand its offerings, such as turning its Old Bay seasoning into a limited-edition hot sauce last year.
And just prior to year's end, McCormick announced the $700 million acquisition of FONA International to add products in the natural flavorings niche, grow manufacturing capacity, and expand its technology platform.
FONA's niche includes flavors for "health and performance nutrition applications," and is complementary to McCormick's existing portfolio, the company said in the announcement.
Weathering a market crash
A market crash will affect stocks differently, depending on the sector and its valuation. In addition to the balance of both home consumer customers and the commercial food service industry, McCormick should be less affected because consumer staples generally don't move as aggressively -- either up or down -- as highflying technology stocks, for example.
McCormick shares are up about 9% in the past year, trailing the overall S&P 500 index returns of about 15%. That doesn't mean it can't drop more than the market index in a crash, but it's an indication that the stock could be less volatile. Historically, this has been true, as its five-year beta of 0.44 shows the stock has had about half the volatility of the overall market.
The underlying business supports that theory. Cash generated from operations has been growing steadily over the past several years. During the same period, its debt-to-equity ratio has dropped to almost 1.0, considered a reasonable level of debt -- especially when you consider the company has spent about $5.7 billion on acquisitions since the Reckitt Benckiser deal in 2017.
MKC Cash from Operations (TTM) data by YCharts
Respectable income
Meanwhile, investors receive a dividend that the company raised by almost 10% last November, and which currently yields 1.5%. That's almost triple the return even online savings accounts are giving on cash right now. The dividend should be safe even in an economic downturn. The current payout ratio -- a measure of dividends paid out compared to net income -- is 42%, leaving a nice buffer.
So if you are concerned about a market crash coming in 2021, consider buying shares of McCormick. It provides a decent income from the dividend, and offers potential for long-term growth. Investing in stocks should be all about the long term, and McCormick can help give more risk-averse investors comfort in case of a sharp downturn.
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