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

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