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In this article I will be discussing three consumer goods companies with strong financial performances and healthy dividend yields, which investors should buy for their dividend income portfolio. These companies have a strong dividend history and have comfortably covered their dividends without any cash shortages in the past. These three companies are Coca-Cola (NYSE:KO), Philip Morris (NYSE:PM) and General Mills (NYSE:GIS) and offer dividend yields of 2.9%, 3.7% and 2.8% respectively.

Since the market crash of 2007-08, treasury yields have been trending downward. Currently, the 10-year treasury yield is approximately 2% (as shown in the graph below). In the given low-yield environment, dividend stocks have remained popular among dividend seeking investors.
(click to enlarge)

Coca-Cola
Coca-Cola, the world's leading beverage company, is among my dividend income picks. The company has operations worldwide and more than 60% of total revenues are generated from international markets. KO currently offers a dividend yield of 2.9%. Also, the company has increased its dividend by more than 6% per annum from 2009 to 2013. KO has a strong dividend history and its healthy dividend coverage indicates dividends are sustainable going forward. Moreover, the moderate payout ratio of 50% displays the fact that dividends can be increased further by increasing the payout ratio.

2009

2010

2011

2012

Free Cash flow (US $ m)

6200

7320

6850

7998

Dividend (US $ m)

3800

4070

4300

4595

Dividend Coverage

1.60x

1.80x

1.60x

1.75x

Payout Ratio

55%

50%

48%

50%

Gross Margin

64%

64.5%

61%

61%

Net Margin

22%

23%

19.5%

19%

Source: Yahoo Finance and Company reports

KO has delivered strong financial performances in the past, evident by the fact that in the last three years sales and EPS grew by 13% and 14% respectively on an annualized basis. The company has strong margins and has been able to maintain them despite sluggish economic conditions and competition. The company has been working to improve upon its cost structure; last year the company initiated a four-year reinvestment and productivity plan, which will help the company save $550-$600 million annually.

Philip Morris
PM has operations around the world and is a leading tobacco company in the industry. The company has delivered strong financial performance in the past and has been sharing its successes with its shareholders through dividends and share repurchase program. It currently offers a dividend yield of 3.7% and dividends have increased at almost 15% per annum from 2008 to 2012. Given its strong dividend history and healthy dividend coverage over the years, I believe dividends offered by the company are safe and will grow going forward.

2009

2010

2011

2012

Free Cash flow (US $ m)

7169

8724

9632

9094

Dividend (US $ m)

4330

4420

4790

5481

Dividend Coverage

1.65x

2.00x

2.00x

1.65x

Payout Ratio

65%

60%

54%

62%

Gross Margin

64%

64%

66%

67%

Net Margin

25%

27%

28%

29%

Source: Yahoo Finance and Company reports

In the last three years, PM has been successful in growing its sales 6.3% and EPS at 13.5% per annum. Gross and net margins for the company have been trending upwards over the years as well. In 2012, gross and net margins were 67% and 29% respectively. Also, the company has returned approximately $40 billion to its shareholders through dividends and share repurchases since 2008. Last year, the company started its three-year buyback plan of $18 billion (13% of current market capitalization), which is spread over a three-year time period.

General Mills
GIS is the leading consumer foods company with markets all over the world. The company owns a diverse and strong brand portfolio. The company has posted healthy financial performance over the years and has been expanding its markets worldwide. In the last three years the company has increased its sales at 4.6% and EPS at 7.4% per annum.

GIS offers a healthy dividend yield of 2.8%, has a payout ratio of 48% and increased dividends at more than 12% per annum since 2009. It has paid dividends continuously without a dividend cut for 113 years. The relationship between free cash flow and dividends indicates that dividends offered by GIS are sustainable.

2009

2010

2011

2012

Free Cash flow (US $ m)

1340

1600

730

1865

Dividend (US $ m)

580

645

730

800

Dividend Coverage

2.30x

2.50x

1.00x

2.30x

Payout Ratio

42%

40%

45%

48%

Gross Margin

36%

40%

40%

37%

Net Margin

9.50%

11%

11%

10%

Source: Yahoo Finance and Company reports

Recently the company reported FY'13 second-quarter results. Quarterly net sales grew by 6% to $4.88 billion. Also the company was able to beat earnings estimates of $0.79 by posting an adjusted EPS figure of $0.86 per share.

Source: 3 Consumer Stocks For Dividend-Seeking Investors