General Mills, Inc.: Dividend Growth Is Back!
Reliable Income Stock Just Resumed Dividend Growth
Income investors like companies that raise their payouts every single year.
The reason is two-fold: first, continuous dividend hikes are a sign of strength in the underlying business; and second, if a company has been following the pattern of annual dividend increases, management will likely want to continue that track record.
But if you only look at companies with annual dividend hikes, you would have missed General Mills, Inc. (NYSE:GIS), which happens to be a solid income play.
General Mills is in the food business. In fact, it is one of the largest manufacturers and marketers of branded consumer foods in the world, with products sold in more than 100 countries. The company’s portfolio consists of many popular brands, such as “Cheerios” cereal, “Yoplait” yogurt, “Häagen-Dazs” ice cream, and “Nature Valley” granola bars.
The food industry is known to be a resilient one. Think about it, people may not be buying as many new cars as before when the economy enters a downturn, but filling up their pantries and fridges is still a priority.
And that’s one of the reasons why General Mills has built a reputation as a reliable dividend stock. Looking back, we can see that the company and its predecessor have been paying uninterrupted dividends for over 120 years. (Source: “Dividends and Stock Splits,” General Mills, Inc., last accessed September 23, 2020.)
General Mills also delivered a lot of dividend growth. However, after acquiring Blue Buffalo Pet Products Inc in 2018, the company decided to just maintain its quarterly dividend rate at $0.49 per share until it lowers its leverage.
The good news is that dividend growth is now back at GIS stock.
On September 23, General Mills’ board of directors declared a quarterly cash dividend of $0.51 per share, representing a four-percent increase from the previous level. The dividend will be paid on November 2, 2020 to shareholders of record as of October 9. (Source: “General Mills Reports Strong Fiscal 2021 First-Quarter Results And Announces Dividend Increase,” General Mills, Inc., September 23, 2020.)
The company has successfully reduced its debt load.
On the conference call following the press release, General Mills’ chairman and chief executive officer, Jeff Harmening, said, “With our leverage at a comfortable level, we like the flexibility it gives us to consider future dividend growth and to activate our other capital priorities, including strategic acquisitions and share repurchases.” (Source: “General Mills First Quarter Fiscal 2021 Earnings Prepared Remarks Transcript,” General Mills, Inc., September 23, 2020.)
Now, keep in mind that we are still in a challenging time. And with many companies reporting substantial sales and profit declines due to the COVID-19 pandemic, dividend cuts are not uncommon. In other words, income investors would probably be content if their portfolio companies can maintain their dividends in today’s environment.
So, for most companies, there was really no rush to announce dividend growth. The fact that General Mills is choosing to resume raising its payout at this time shows how willing the company is to return cash to shareholders.
It also helps that business is actually growing at General Mills.
On the same day that the company announced the dividend hike, it also reported financial results for the first quarter of its fiscal year 2021, which ended August 30, 2020.
For the quarter, General Mills generated $4.4 billion in net sales, representing a nine-percent increase year-over-year. Excluding the effect from foreign exchange rate fluctuations, acquisitions, and divestitures, organic net sales at General Mills rose 10%.
The main reason behind the top-line growth was that the COVID-19 pandemic has resulted in elevated at-home food demand, which has led to increased volume in General Mills’ business.
At the same time, the company also improved its operating efficiency. In the reporting quarter, General Mills, Inc. achieved an adjusted operating profit margin of 19.1%, marking a 210-basis-point expansion from the year-ago period.
At the bottom line, GIS stock earned adjusted net income of $1.00 per share, representing a 27% year-over-year increase on a constant currency basis.
Considering that the company declared and paid a cash dividend of $0.49 per share during the first fiscal quarter, it was paying out less than half of its adjusted profit.
Bottom Line on General Mills, Inc.
As you’d expect, the recession-proof nature of General Mills’ business means its shares are sought after in this extraordinary environment. Year to date, General Mills stock has climbed more than 10%.
With GIS stock trading at $57.70 apiece, the company’s new dividend rate translates to an annual yield of 3.5%. Considering that General Mills, Inc. has resumed dividend growth, shareholders can look forward to earning higher yield on cost in the years ahead.