General Mills (GIS) Dividend Stock Analysis

General Mills, Inc. (GIS) manufactures and markets branded consumer foods worldwide. This dividend achiever has paid dividends since 1898, and has increased them for ten years in a row.

The company’s last dividend increase was in March 2013 when the Board of Directors approved a 15% increase in the quarterly distribution to 38 cents /share. The company’s peer group includes Heinz (HNZ), Hershey (HSY) and Kellogg (K).

Over the past decade this dividend growth stock has delivered an annualized total return of 10.30% to its shareholders.

The company has managed to deliver a 7.60% average increase in annual EPS since 2003. Analysts expect General Mills to earn $2.68 per share in 2013 and $2.91 per share in 2014. In comparison, the company earned $2.35/share in 2012. Over the next five years, analysts expect EPS to rise by 7.93%/annum. The company has also managed to consistently repurchase 1.87% of outstanding shares each year over the past decade.

The company may be able to achieve earnings growth through expanding internationally, particularly in emerging markets, introducing new products, making strategic acquisitions as well as managing its bottom line. The industry is characterized by intense competition, but stable overall revenues, which are somewhat immune from the economic cycle. The acquisition of Heinz has definitely increased interest and valuations for food companies like General Mills so far in 2013.

General Mills has a very high return on equity, which has also increased over the past decade. I generally want to see at least a stable return on equity over time. I use this indicator to assess whether management is able to put extra capital to work at sufficient returns.

The annual dividend payment has increased by 8.70% per year over the past decade, which is slightly higher than the growth in EPS.

A 9% growth in distributions translates into the dividend payment doubling almost every eight years on average. If we look at historical data, going as far back as 1986, one would notice that the company has managed to double distributions every eight and a half years on average.

The dividend payout ratio has increased from 45% in 2003 to 545 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.

Currently General Mills is attractively valued at 17.60 times earnings, yields 3.20% and has a sustainable distribution. I would consider initiating a position in the company subject to availability of funds.

Full Disclosure: Long K

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