Dividend Growth Stock Investing
General Mills (GIS) is one of the leading consumer foods companies. They are the maker and seller of famous brands such as Cheerios, Wheaties, Total, Chex, Betty Crocker, Bisquick, Hamburger Helper, Yoplait yogurt and Progresso soups. The food business has been good for General Mills as it has allowed them to pay yearly increasing dividends to their shareholders as they have increased their dividend for 9 years in a row.
Dividend Growth and Current Yield
General Mills currently pays a dividend of $0.33 per quarter for a $1.32 annual dividend. At the close of market on Friday, February 1st GIS’s price per share was $42.13. This gives the stock a current dividend yield of 3.13% (1.32/42.13). Typically I look for a dividend yield of at least 2.5% so I would be satisfied with this dividend yield from GIS.
In 2003, General Mills payed an annual dividend amount of $0.55 per share. The dividend trend has been up each year as it now pays $1.32 annually per share. This gives GIS a 10 year annual compound dividend growth rate of 9.15%. More recently the annual dividend growth rate was 8.93% for 2011 to 2012 and 8.2% from 2012 to 2013. This is a good rate of dividend growth for shareholders to enjoy. General Mills has shown
a commitment to it’s shareholders with their near decade long history of increasing dividends. As long as they continue to increase their dividend at a faster rate than inflation, shareholders should be happy.
Earnings Per Share Growth
General Mills had a 2002 earnings per share (EPS) of $0.85 and a 2012 EPS of $2.56. Over the 10 years their earnings per share have been consistently climbing upward at a strong rate. I especially like seeing that General Mills was able to continue earnings growth through the recession years of 2008-2010. General Mills has had a 10 year EPS growth rate of 11.66% which is a great growth rate. More recently General Mills’ annual EPS growth rate was 7.83% from 2010 to 2011 and 3.23% from 2011 to 2012. While I would like to see the most recent year EPS growth rate higher, owners of General Mills stock should be pleased with the 11.66% EPS average annual growth rate over the past decade. For 2013, Microsoft has an estimated EPS from Value Line of $2.65. which shows they expect EPS to continue growing although at the slower rate seen in more recent years.
Net Income Growth
Net income has shown the same pattern as EPS from 2002 through 2012. Net Income was 581,000,000 in 2002 and grew to 1,707,300,000 in 2012. This gives GIS a compound annual net income growth rate of 11.38%. More recently GIS had a net income growth rate of 5.12% from 2010 to 2011 and 3.35% growth from 2011 to 2012. While net income has grown well over the past 10 years, the slowing of growth recently may cause some concern for investors. However, net profits are still growing and shall continue to reward owners in the future as long as management can continue getting good results.
Sales Growth
Sales have been growing for General Mills over the past 10 years in a consistent uptrend as well. The compound annual growth rate of sales revenues was 7.68%. While EPS and net profits have been growing around 11%, sales have only been growing at 7.6%. This is of concern for investors because it most likely means that EPS and net profits growth will slow which we have seen in more recent years. Possibly owners of General Mills won’t be able to expect spectacular growth rates in the double digits from General Mills in the upcoming years.
Outstanding Shares
Generally I like to see a decreasing trend or at least a consistent balance in the number of outstanding shares of the company. Since 2004, GIS’s outstanding share count has been decreasing every single year. Since 2004, they have managed to decrease the number of shares outstanding by a little over 100 million shares. With less shares outstanding, the value of each share still available increases. When a company decreases the number of shares available it means the shares I own will have rights to a greater portion of the companies profits.
Return on Equity Trend
When evaluating a company I look for return on equity to be consistently above 12%. General Mills has had a nice return on equity near or above 20% over the past decade. Maintaining a consistent return on equity shows me that management is doing a good job with shareholders investment.
Current Ratio
Current ratio measures a companies ability to meet short term obligations. General Mills has a 2012 FYE current ratio of 0.96. This means that current assets will be able to cover 96% of current liability obligations. I generally want to see this number be above 1 which General Mills is almost at.
Net Profit to Long Term Debt
This number tells me how many years worth of profits it will take to pay off the current long term debt of the company. I like looking at this metric because it gives me an idea of whether the company has taken on too much debt or not. Generally I look for this number to be less then 5 meaning if the company used all their earnings over the next 5 years they could wipe out all debt. For GIS this net profit to long term debt ratio stands at about 3.6 for 2012. This means General Mills would be able to pay off all long term debt with about three and a half years worth worth of profits. In my opinion General Mills does not have too much debt on their balance sheet.
Dividend Payout Ratio
The dividend payout ratio measures the dividend per share compared to the earnings per share. How much of a companies earnings per share are they paying out to shareholders in the form of a dividend. The past few years GIS has maintained a dividend payout ratio around 40-50%. This tells me that General Mills is paying out around 45% of profits to shareholders and keeping 55% of profits to grow the company and increase shareholder value through share repurchases. I like this payout ratio because it is fairly low and I don’t believe General Mills should have any trouble maintaining dividend growth in the future even if the company faces struggles near term.
Price/Earnings Ratio
The P/E ratio is a metric I look at to determine if a companies current stock price is too high or within reason. With the most recent closing market price of $42.13 and most recent EPS of $2.56, MSFT has a current P/E right around 16.5. Typically the market P/E average is right around 14 so compared to the market in whole I might determine GIS to be slightly over valued. Given the slowing growth over the past two years of GIS it may seem the market is pricing GIS a little high.
Looking at GIS’s past P/E ratios of the last few years it looks like they have ranged from a high of 20 to a low of 15. During 2010 you would have been able to pick up shares as low as 10 times earnings. The current P/E of 16.5 is at the low end of the range of 15 to 20 which is the range of P/E GIS has traded the majority of time over the past decade. This could be a chance to get in at a valuation in the lower range that the market usually values GIS. Based on the companies performance, I believe the current valuation to be fair depending on your opinion of how GIS will grow earnings going forward.
Return Projections
GIS had EPS of $2.56 in 2012. The past earnings per share growth rate has been roughly around 11% but we calculated a slower growth rate in sales. Therefore I am going to use a more conservative EPS growth rate of 8% over the next 10 years to figure out what 2022 EPS might look like. This gives me an estimated EPS of $5.53 for GIS in 2022.
If GIS is trading at reasonable P/E ratio of 15 in 2022 then it will have a market price of $82.95/share (5.53*15). This will give me an estimated annual growth rate for General Mills of 7% over the next 10 years. If you would be happy with a 7% return over the next 10 years as well as collecting increasing dividends along the way then GIS may be a good investment for you. This is a very rough exercise based on growth estimates that may not come to reality. Actual returns in GIS will vary depending on how well the company increases their earnings and how the market values GIS in the future.
Recommendation
Based on the above analysis I believe General Mills to be a hold at current levels. I think the addition of General Mills to a dividend growth portfolio would provide a solid blue chip company that is an industry leader in the consumer foods market. If you really want to own this company then I would think today’s valuation is a good entry point. However, given the slower growth rate of earnings by GIS, I do not feel they would be anything more than an average performer in any portfolio over the next few years at current valuations. This is why I give GIS a hold recommendation. They can provide a solid foundation to dividend growth portfolios but I wouldn’t expect anything more than average returns from owning this company.
Do you have an opinion on General Mills? Please share your thoughts in the comments below!
Disclosure: I do not own any shares of GIS.
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4 Responses to General Mills Dividend Stock Analysis
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I’ve got a target entry in the $36-37 range. I agree that it’s a at an okay price currently, but nothing that is screaming buy. Although there should be consistent DG going forward from a company with predictable growth. If it pulls back to mid to upper $30′s I’d be interested. Nice analysis.
JC I agree I’d also be very interested if GIS had a slight pull back. I think GIS is a solid performer with steady earnings and dividend growth. I especially like the fact that even during the recession they were still able to show increasing earnings. I think GIS would be a solid addition to most portfolios. I’d just prefer a slightly lower price to offer more return possibilities going forward. Thanks for your comments!
Hi Dan, loved your analysis. I agree with you that the recent slowdown in earnings growth is concerning, particularly since revenue growth has not been able to keep up over the past 10 years. Has there been a recent catalyst for the recent slowdown or is it simply due to the revenue-lag alone?
Hey Dustin thanks for the comments. I didn’t really have a look into the reasoning behind the recent earnings growth slowdown. I think if you were considering an investment in GIS, then that is definately something to look into to determine if it is just short term pressure or if this is some kind of issue that could have long term effects. I think even with the slowed down growth, GIS can still offer average returns going forward. Personally I think average returns from a blue chip steady company like GIS may be good for a portfolio as I don’t see GIS going away in the future. They’ll still be here for many years selling their Cheerios and Yoplait and owners can feel good about the long term reliability of the company even if it is just average returns.