Why McCormick is worth a premium

Donald Saltz

June 19, 1992|By Donald Saltz

McCormick & Co.'s board of directors meets today to decide the amount of the second-quarter dividend. If the directors follow the pattern that has prevailed for the past four years, that dividend will be raised, probably by 1 cent a share.

To the casual observer, this might not seem like much, a mere penny for each share and only $1 if one owns 100 shares of McCormick.

But McCormick's dividend increases are more than skin deep. They come often, and their value is multiplied by the relatively frequent stock splits effected by the company. The fact is that Sparks-based McCormick has one of the best dividend growth records among all U.S. corporations.

Since McCormick made the big decision five years ago to get out of the real estate business, the company's shares have been split three times, each 2-for-1 -- meaning that every 1987 share is now 8 shares. Additionally, the cash payout has nearly tripled since '87, with earnings up by an even larger percentage.

For more than four years now, the company has raised the dividend twice a year, doing so every other quarter. McCormick has demonstrated not only that it is an exceptionally well-managed business but also that it is more stockholder-oriented than most other companies.

McCormick's current dividend yield is under 2 percent, but the frequency of increase over a few years greatly elevates the yield on the purchase price. Consider that the year-end 1987 dividend yield was 2.7 percent and is now the equivalent of almost 8 percent.

A company that raises its dividend often, as does McCormick, is worth a premium price. Many companies with dividend yields of 2 percent or less grow in value regularly, but their yields remain constant. This is because dividend increases keep up with the growth in the share prices. For example, for years McCormick's dividend yield has been in the vicinity of 2 percent, with both dividend and share price rising to keep it that way.

Shopping for banks

The recent hint that several large regional banks were interested in acquiring MNC Financial Inc. opens up the broader question of what other banks might be sought.

There are several reasons why some large out-of-the-area banking companies might bid for local banks in a quest to build larger institutions.

For one, banks have gone through their worst loan problems and have probably already set aside the funds that could be needed to cover bad loans, meanwhile tightening up on new loan approvals.

Most banks, having cut expenses, are operating profitably with earnings improving.

Citizens Bancorp of Laurel has been considered a buyout possibility for years, and in recent years it even sold several dollars a share below book value. Currently, the shares sell for about $2 above book value, which is still in an attractive takeover range.

Citizens' $3 billion in assets is relatively small compared with the $19 billion of assets at MNC Financial, but Citizens has seen its earnings decline during recent years despite conservative lending policies. Of Citizens' 131 offices, 120 are in Maryland. The banking firm has been closely managed by members of the Smith family for most of its life.

Citizens' shares yield 5.3 percent, and the dividend is regarded as safe even though earnings have narrowed.

But not all successful banks should be regarded as takeover potential. Baltimore's Mercantile Bankshares Corp., with more than $5 billion in assets, is larger than Citizens and has much heftier earnings.

Like Citizens, Mercantile has limited bad loan exposure, but what might negate a takeover is its selling price of more than $30 a share and book value of only about $17 a share.

The premium that would be paid over book value is just too high.

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