Top picks 2012: McCormick & Co.

Sticking with a trend can be a good thing. The trend I'm sticking with in 2012 is dividend-growth investing � buying shares in companies that continually increase their dividend year after year.

That�s why I�m going with McCormick & Co. (MKC) in 2012. The company has decades of annual dividend increases behind it.

The latest increase occurred in November, when the board hiked the quarterly payment 11% to $0.31 a share from $0.28, thus marking 26 consecutive years of increased payouts.

McCormick brands command 40-60% of the spices, herbs, and seasonings market in which it competes. �

Innovation and invention would seem at odds with so basic a product. But nearly 10% of McCormick's $3.3 billion in 2010 was derived from new value-adding products such as Grill Mates, Slow Cookers and Perfect Pinch Seasoning Blends. All were introduced in the past three years.
McCormick continues to extend its reach by targeting new growth opportunities in the Latino market. According to the U.S. Census, over the past 10 years the Hispanic population has surged 43% to 50.5 million in 2010 from 35.3 million in 2000.

Additional growth opportunities exist overseas in developing economies. McCormick has been expanding aggressively over the past year, buying a Polish spice maker and starting a joint venture with a firm in India.

Management, by extending established names and acquiring new businesses in new markets, keeps revenue, earnings, and dividend growth on a northerly trajectory.

That trajectory has taken a sharper incline of late. Revenue growth over the past 10 years has averaged 5.4%, and has picked up considerably to 8.7% over the last 12 months.� �

McCormick's earnings growth is even more intriguing. Earnings per share have grown 11% annually for the past 10 years. �

I chalk up strong EPS growth to management's innate ability to ring inefficiency out of the firm's operations: In 2001, gross and operating margins were 40.9% and 10.6%, respectively; at the end of 2010, gross and operating margins were 42.5% and 15.3%. �

I expect this trend of efficient growth to continue into the relevant future. Revenue is expected to grow 10% in 2012 to $4.05 billion, while EPS is expected to grow 13% to $3.15, which puts the forward price-to-earnings multiple at 15 � the low side of the five-year average of 18.

Given management's proven ability to grow McCormick smartly and efficiently, I think it is deserving of a higher multiple, particularly when factoring in the likely prospect of slow, or even no, growth in the major western economies.

I think more investors, increasingly starved for income and growth, will flock to companies like McCormick.