Investors have beaten down General Mills…
The business was high flying in 2016 with a market cap of $43 billion. It’s now about half that level at $26 billion.
The drop has created a great value income play. So let’s dive into the details…
General Mills is a huge name in the consumer sector…
It operates out of Minneapolis and employs 40 thousand people. Last year it pulled in $16 billion in sales. That breaks down to $394 thousand per employee.
The workers span six continents and market products in more than 100 countries. Its sales outside of the North America Retail segment make up more than 30% of the total.
Some of its major brands include: Cheerios, Chex, Betty Crocker, Yoplait, Nature Valley, Green Giant, and many more.
General Mills has diversified its product offerings and they sell through both the good and bad times. As a result, the business holds a solid credit rating of BBB. This allows it to issue cheap debt to build its business and finance other projects.
One area that I focus on is the money that General Mills returns to shareholders.
The company has an epic story of paying dividends. It’s one of only a few companies that has paid a dividend every year since 1928. Let’s dive into the last decade…
General Mills 10-Year Dividend History
The board of directors has approved larger dividends each year over the last decade. This makes the company one of the dividend achievers.
Here’s a closer look at the 10-year dividend history…
The dividend has grown 7.4% annually over the last five years and 2.1% in the last year. The slowdown in growth is not a great sign. Although, it still might be a good income investment.
The dividend yield sits at 4.5% and that’s above its 10-year average of 3.7%…
The higher yield shows that it might be a better value play at its current level… or that investors have sold off shares for a good reason.
General Mills has a long history of paying dividends. Knowing if it can keep paying and raising them is vital for income investors…
Is the Dividend Safe?
Top line growth of the business is a good place to start.
The chart below shows that sales are up 7.1% over the last 10 years…
Over the last five years, General Mills has lost market share…
Grocery stores are putting pressure on the business. Walmart, Target and other retailers are developing store brands and giving them better shelf space.
This is one reason investors have sold off shares. Another is that consumers are shifting towards healthier options.
Amazon’s entry into the grocery space also is another reason investors are jumping ship. Amazon announced its acquisition of Whole Foods in 2017 and disruption is on the horizon.
These are good reasons behind the General Mills sell off… but the business has a long history of adapting. The company is also financially sound and can continue paying and raising its dividend.
Many investors look at the payout ratio to determine dividend safety.
Normally payout ratio is dividends per share divided by net income. Although, accountants can manipulate net income with varying rules. I use free cash flow instead. It’s a better indicator of money flowing into the business.
Although sales dropped in the last few years, General Mills has plenty of room to pay and raise its dividend.
The 50% payout ratio shows that the company pays investors $0.50 for every $1 it brings in the door. Big swings in this ratio and a high level can indicate an upcoming dividend cut.
There are some headwinds on General Mills sales but the dividend is safe. The company has adapted for over 160 years. This time isn’t any different and I’ll collect the thick and sustainable 4.5% yield in the meantime.
P.S. I recently bought shares of General Mills as a long-term holding. The metrics above are just the tip of the iceberg when it comes to my research. I also factor in my current and future tax situation. This consideration and the short-term volatility might not make it a suitable investment for everyone.