Friday, January 23, 2015

General Mills (GIS) Dividend Stock Analysis

General Mills, Inc. (GIS) manufactures and markets branded consumer foods in the United States and internationally. This dividend achiever has managed to increase distributions to its shareholders for 11 years in a row.

The most recent dividend increase was in March 2014, when the Board of Directors approved an 8% increase in the quarterly dividend to 41 cents/share.

The company’s largest competitors include Nestle (NSRGY), Kellogg (K) and Danone (DANOY).

Over the past decade this dividend growth stock has delivered an annualized total return of 11.40% to its shareholders. Future returns will be dependent on growth in earnings and dividend yields obtained by shareholders.

The company has managed to deliver a 7.50% average increase in annual EPS over the past decade. General Mills is expected to earn $3.01 per share in 2015 and $3.22 per share in 2016. In comparison, the company earned $2.83/share in 2014.

The company has utilized share buybacks in order to reduce the number of shares outstanding from 818 million in 2005 to 632 million in 2014.

General Mills has a portfolio of strong brands, as well as the scale of operations to make products and sell them efficiently. In addition, the company is trying to maintain an innovative approach and either develop in house or acquire products in growth niches. Consumer tastes tend to slowly evolve over time, which is why companies like General Mills that try to stay innovative and capture major trends in tastes and deliver profits. Continued product innovation is the key to capturing future growth. That being said, the bread and butter of consumer products companies are its established brands, where a large portion of consumers engage in repetitive purchases, that create repetitive cashflows, which make investing in consumer staples such a steady and profitable endeavor. While things do change over time, the change is much slower than that in the technology field, which makes it easier for companies to react, adapt and profit to the changing environment. Having a steady marketing budget also helps to maintain the broad appeal of the company’s products.

Earnings per share could increase from new product offerings, strategic acquisitions, international expansion and streamlining of operations. A constant focus on operations, eliminating unnecessary costs, improving margins and reducing negative effects of input costs are something that should help the company accomplish its targets. The company is able to expand its distribution network on a global basis, invest in innovation and in its strong brands. Having a portfolio of stable food brands generates recurring excess cash flows. Those excess cash flows are not necessary for expansion of the business. Therefore they result in the ability for the company to shower shareholders with more cash every year through regular dividend payments and increases.


The annual dividend payment has increased by 10.90% per year over the past decade, which is much higher than the growth in EPS. Future growth in dividends will be much lower than that however, likely around 7% - 8% annually, and will be limited by the growth in earnings per share.

A 7.50% growth in distributions translates into the dividend payment doubling every nine and a half years on average. If we check the dividend history, going as far back as 1987, we could see that General Mills has managed to double dividends almost every nine years on average.

In the past decade, the dividend payout ratio has increased from 40.30% in 2005 to 54.80% by 2014. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

General Mills has also managed to generate a high return on equity, which also increased from 22.50% in 2005 to 27.60% in 2014. I generally like seeing a high return on equity, which is also relatively stable over time.

Currently, General Mills is attractively valued at 17.80 times forward earnings and yields 3.10%. I am slowly building my position in the stock, and have been doing so this year. I have also sold some long-dated puts on the company, which have 50/50 odds of being exercised.

Full Disclosure: Long GIS, NSRGY and K

13 comments:

  1. Thanks for the analysis, DGI.
    I am long GIS and have been for a couple of years. I have some cash available that may be used for that purpose. I have also been considering NSRGY, but have held back because of the Swiss tax withholding. It appears that an after tax account would be a more appropriate place to purchase NSRGY because you can recover some of the withheld taxes, but I would appreciate your input.
    Thanks,
    KeithX

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  2. Thanks DGI. I have watched GIS for quite a while and have a $48 share price on it. I has hit my 3% yield threshold though... soon! Regards, Rog

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  3. Good article! GIS is one of 11 "dividend zombies". These are companies with over 100 years of uninterrupted and undiminished dividends. The members include GIS (1898), ED (1885), PG (1891), XOM (1882), KO (1893), SWK (1877), CL (1895), PPG (1898) and three Canadian banks BNS (1832), CM (1867) & TD (1855).

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  4. Good article. I hope to add some GIS to my portfolio as funds allow. I'll actually be rotating out some high yield, no growth issues into GIS. I'm at a point where I can remain financially independent at increasing lower short term yields. Rotating into growth will allow me to outpace inflation without having to return to work.

    You left out what I consider to be a huge plus for GIS which is the opportunity in foreign markets that have just barely been penetrated so far. They have operations in India and China and both countries are bringing online more middle class consumers over the next few decades than America has in total population. They will certainly eat more processed grains and adopt foods of convenience. The growth potential for GIS is huge, especially for what is commonly thought of a big slow moving slug of a blue chip. Very bullish on GIS in India/China!

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  5. Not sure where you are getting your PE ratio from Yahoo shows about 23 PE. Per Y-Charts PE is highest in last ten years. can't load picture.

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    Replies
    1. He cited the forward P/E ratio which takes in to account expected future earnings. Keep in mind that forward P/E ratio is not as reliable since it is simply an estimate.

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  6. Great analysis, I'm slowly building position in GIS as well.

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  7. Only major cereal that does the whole grains for there brands. They are changing with the times which is good for us.

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  8. Thanks for the article. GIS is defintely one of the true dividend champions!

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  9. I'll wait until the share pull back down a bit more to P/E to 12-15, it's on my watch list now. Thanks for the analysis. The chart show the company increase in earnings as well as dividend growing, that a very good combination it have in our portfolio.

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  10. As usual, great analysis!! I've been looking at this sector myself as I begin to diversify my portfolio into dividend growth stocks. GIS is on my radar and one day will acquire; however, I'm leaning more towards Kellogg as my initial purchase. My pantry is full of GIS, K, KO and Nestle and it's about time my portfolio gets a taste--just looking for the best price possible. Coupons? If not, maybe Mr. Market will have a discount.

    As always, thank you.

    Raymond.

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  11. Hi DGI...Congratulations for the #1 spot in the "world's greatest financial bloggers" (Benzinga).
    I always loved GIS's financials. Very solid. Very shareholder friendly company.
    What i have always missed are convincing catalysts for long term growth.
    It seems that some of the company's most important products are declining as a result of the consumer shift towards healthier, less processed foods. Besides, GIS has not been a tremendous success story outside the US, notably in emerging markets...What is your take on this?

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  12. Another good analysis! GIS has been an attractive stock for a while already. Looks like a good move to make.

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