General Mills: 115 Years Of Dividends And Counting

May.27.14 | About: General Mills, (GIS)

Summary

Shareholders of General Mills can expect a CAGR of 7% to over 10%.

General Mills has paid uninterrupted dividends without a reduction for 115 years.

International sales have grown 11% in 9 months.

General Mills' Small Planet Foods division is experiencing significant growth.

The company's standard deviation of 17.02% is among the lowest of any business.

Click to enlarge

General Mills (NYSE:GIS) is a global producer of branded food products. The company's food portfolio includes cereals, baking products, snacks, frozen foods, meals, and yogurt. The company has a very impressive history of rewarding shareholders. General Mills has paid regular dividends without interruption or reduction for 115 years.

Current Events

General Mills sales are up 2% for the most recent nine-month period. This is in line with the company's long-term expectations of low single-digit revenue growth. Small Planet Foods products have grown revenue 8% for the most recent nine months. International sales have increased 11% on a constant currency basis due to strength in Latin America and the Asia/Pacific region over the last 9 months.

Future Growth

International sales are fueling General Mills' growth. International sales currently account for about 30% of General Mills' sales. This number will continue to rise as international growth greatly exceeds domestic (US) sales growth. Recent international growth for General Mills has come from their acquisition of Yoplait in 2011. The emergence of middle class consumers in the developing world presents an exciting opportunity for General Mills. Globalization and the convergence of consumer tastes coupled with emerging market consumer growth will drive sales for General Mills.

General Mills Small Planet Foods Products is also experiencing strong growth. Sales for 2014 should grow double digits, as they did in 2013. Growth in this division is being driven by the trend toward health conscious food. Small Planet Foods brands include Lara Bar and Cascadian Farm Organic. Currently, Small Planet Foods accounts for about 2% of General Mills revenue. The company will likely bolster this division in the future through investment and acquisitions.

Shareholder Return

Management expects long-term revenue growth in the "low single digits"; between 2% and 3%. The company is expected to repurchase around $600 million worth of shares in 2014, and has averaged around $800 million in repurchases over the last 4 years. I expect share repurchases to boost growth by 2% to 3%. General Mills' current dividend yield is 3%. Shareholders of General Mills can expect a CAGR of around 7% to 9% going forward from growth (2% to 3%), share repurchases (2% to 3%), and dividends (3%).

In addition, management believes they can increase operating profits by raising margins. Operating margins tend to be mean reverting, so I typically don't include gains in this category. Gross margin has actually fallen from a high of 40% in 2011 to 36.1% in 2013. If management can follow through on increasing margins, shareholders could see a 10%+ CAGR.

Managements long-term growth projections are below:


Source: 2013 Annual Report

Valuation

General Mills appears to be fairly valued based on its P/E ratio compared to its peers.

Ticker

Company

P/E

GIS

General Mills, Inc.

19.71

K

Kellogg Company

12.92

MJN

Mead Johnson Nutrition Company

25.81

CPB

Campbell Soup Co.

20.69

CAG

ConAgra Foods, Inc.

16.72

SJM

The J. M. Smucker Company

18.12

MKC

McCormick & Co. Inc.

23.90

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The company's P/E ratio is very close to the S&P500's P/E of 18.97. Based on both its peer comparison, and comparison to the S&P500, General Mills appears to be fairly valued in relation to other businesses at this time.

Consecutive Years of Dividend Increases

General Mills has paid continuous dividends without interruption for 115 years. This is among the longest streaks of any business. The company is not a 'true' Dividend Aristocrat, as it has not increased its dividend each year in the last 25 years. General Mills long history of rewarding shareholders through rising dividends exemplifies the companies stability and brand strength in the slow-changing consumer foods industry.

Why it matters: The Dividend Aristocrats (stocks with 25-plus years of rising dividends) have outperformed the S&P 500 over the last 10 years by 2.88 percentage points per year.
Source: S&P 500 Dividend Aristocrats Factsheet, February 28 2014, page 2

Dividend Yield

General Mills has a dividend yield just above 3%. This compares favorably to other companies with 25+ years of dividend history. General Mills has the 33rd highest dividend yield out of 112 stocks with 25+ years of dividend history.

Why it Matters: Stocks with higher dividend yields have historically outperformed stocks with lower dividend yields. The highest-yielding quintile of stocks outperformed the lowest-yielding quintile by 1.76 percentage points per year from 1928 to 2013.
Source: Dividends: A Review of Historical Returns

Payout Ratio

General Mills payout ratio of 52.30% ranks it at 79 out of 112 businesses with a 25+ year dividend history. The company's dividend yield is somewhat high, but presents no danger of the company canceling its dividend due to extremely stable cash flows.

Why it Matters: High-yield, low-payout ratio stocks outperformed high-yield, high-payout ratio stocks by 8.2 percentage points per year from 1990 to 2006.
Source: High Yield, Low Payout by Barefoot, Patel, & Yao, page 3

Long-Term Growth Rate

General Mills has grown revenue per share at 6.84% over the last decade. This compares very favorably to other long-term dividend stocks. General Mills ranks in at 29 out of 112 stocks based on this metric.

Why it Matters: Growing dividend stocks have outperformed stocks with unchanging dividends by 2.4 percentage points per year from 1972 to 2013.
Source: Rising Dividends Fund, Oppenheimer, page 4

Long-Term Volatility

General Mills is among the least volatile publicly-traded businesses. Its long-term standard deviation of just 17.02% ranks it at 3 out of 112 businesses with a 25+ year dividend history. Businesses with extremely low volatility generally have stable long-term outlooks and predictable cash flows.

Why it Matters: The S&P Low Volatility index outperformed the S&P 500 by 2 percentage points per year for the 20-year period ending September 30th, 2011.
Source: Low & Slow Could Win the Race, page 3

Conclusion

General Mills is an excellent business to invest in for long-term oriented investors. The company ranks very highly based on the 8 Rules of Dividend Investing. Further, General Mills has a long runway of growth ahead of it through expansion in international markets. Shareholders of General Mills should see a CAGR of at least 7%, and possibly 10%+ over the long-term.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.