Investing for income is as simple as picking companies with dividends that are well covered by earnings power and recession-proof business models. That’s because these two characteristics allow for steadily growing passive income as the years unfold.
Few can boast the consistency of Minneapolis, Minnesota-based General Mills (GIS -0.88%) , a consumer staples company that’s paid dividends to its shareholders for 120 years straight. But can this streak continue, and is the stock an appetizing buy for income investors? Let’s drill down into General Mills’ fundamentals and valuation to try to get some answers.
Well-known and commonly used brands equal pricing power
With nine billion-dollar brands, including Cheerios cereal, Yoplait yogurt, and Totino’s frozen pizzas, General Mills is embedded into the daily routines of households around the world. The essential nature of these products to millions of consumers led to General Mills’ strong financial results for the first quarter (ended Aug. 28) of its current fiscal year.
The company’s net sales edged 3.9% higher year over year to $4.7 billion during the quarter. This upward trajectory in net sales was driven by 10% organic net sales growth in the quarter.
General Mills’ healthy organic net sales performance for the quarter was the result of across-the-board growth in its North America retail, pet, and foodservice segments, and its international segments. Price increases and a favorable sales mix to its higher-margin foodservice business unlocked 15% net sales growth for the company. This was partially offset by a 5% decline in General Mills’ organic volume. A solid U.S. dollar (what the company converts its international sales into when it reports earnings) also was a 1% headwind to the company’s net sales. Finally, divestitures of General Mills’ European yogurt business, Helper main meals, and Suddenly Salad side dishes businesses weighed on the company’s net sales by 5% for the quarter.
General Mills recorded $1.11 in non-GAAP (adjusted) diluted earnings per share (EPS) during the first quarter, which was up 12.1% year over year. Due to the company’s price hikes and tight management of costs, its non-GAAP net margin surged 80 basis points higher over the year-ago period to 14.2% during the first quarter. Coupled with a 1.4% reduction in General Mills’ outstanding diluted share count to 606 million, this is how adjusted diluted EPS growth far outpaced net sales growth in the quarter.
A dividend that can endure tough times
General Mills’ 2.7% dividend yield is significantly above the S&P 500 index’s 1.8% yield, which itself is arguably appealing to yield-focused investors. Better yet, the company appears to be well protected against any potentially temporary downturn in profitability.
This is because it is forecasted that General Mills’ dividend payout ratio will be just 53.5% in the current fiscal year. This leaves the company with enough capital to grow its business, reduce debt, and execute share buybacks. Thanks to this balanced capital allocation, analysts are projecting 5.4% annual adjusted diluted EPS growth through the next five years. That’s why I believe General Mills will hand out mid-single-digit annual dividend hikes over the next several years.
General Mills is a wonderful business at a discount
General Mills’ net sales and earnings are steadily churning higher with each passing year. And the stock looks to be an ideal buy-and-hold candidate.
This is based on General Mills’ forward price-to-earnings (P/E) ratio of 19.5. For context, this is just below the 19.9 forward P/E ratio of the S&P 500 consumer staples sector. General Mills’ portfolio of brands can compete with any of its peers’, which is why it should be valued accordingly as well.