Seeking Alpha
, Sure Dividend (2,681 clicks)
Long only, long-term horizon, newsletter provider, dividend investing
Profile| Send Message|
( followers)  

Summary

  • Find out what 3 stocks offer a long history of dividend increases, high yields, and strong growth.
  • General Mills has not reduced its dividend payments in over 100 years.
  • High quality dividend growth stocks offer both income and capital appreciation.
  • McDonald's is growing quickly in emerging markets.
  • Both General Mills and McDonald's are low volatility stocks.

It is difficult to find established businesses with high dividend yields and strong growth in today's overvalued market. General Mills (NYSE:GIS), McDonald's (NYSE:MCD), and Target (NYSE:TGT) all have dividend yields over 3% and long-term revenue per share growth rates over 6%.

This article examines each of these 3 businesses based on the 5 Buy Rules from the 8 Rules of Dividend Investing. The 8 Rules of Dividend Investing identifies high quality businesses trading at fair prices based on several metrics including number of years of dividend payments without a reduction, long-term revenue per share growth rate, and standard deviation.

The 8 Rules of Dividend Investing works by comparing every business with 25+ years of dividend payments without a reduction against each other. This type of comparison creates a quantitative way to determine and rank high quality dividend stocks. In total, there are 128 businesses with 25+ years of dividend payments in the Sure Dividend database.

Each business' current events and growth prospects will be examined as well so each businesses is analyzed both quantitatively and qualitatively.

Consecutive Years of Dividend Payments

General Mills has paid dividends for 114 years without a reduction.
Target has increased its dividend for 44 consecutive years.
McDonald's has increased its dividend for 37 consecutive years.

All three of these businesses has a very long history of dividend payments without a reduction. General Mills' record of over 110 years of dividend payments is especially impressive. The extremely long streak of payments shows how durable the company's competitive advantage is.

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 of 3.09%, the 33rd highest out of 128
  • Target has a dividend yield of 3.47%, the 21st highest out of 128
  • McDonald's has a dividend yield of 3.22%, the 29th highest out of 128

(click to enlarge)

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 has a payout ratio of 58.15%, the 81st lowest out of 128
  • Target has a payout ratio of 70.20%, the 104th lowest out of 128
  • McDonald's has a payout ratio of 58.84%, the 85th lowest out of 128

(click to enlarge)

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

The long-term growth rate of each business is calculated as the lesser of the 10-year per share growth in either dividends or revenue.

  • General Mills has a growth rate of 6.84%, the 32nd highest out of 128
  • Target has a growth rate of 7.56%, the 26th highest out of 128
  • McDonald's has a growth rate of 7.09%, the 29th highest out of 128

(click to enlarge)

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

Long-term volatility for each business is calculated as the 10-year price standard deviation.

  • General Mills has a standard deviation of 17.02%, the 3rd lowest out of 128
  • Target has a standard deviation of 30.14%, the 85th lowest out of 128
  • McDonald's has a standard deviation of 20.14%, the 18th lowest out of 128

(click to enlarge)

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

General Mills Current Events & Growth Prospects

General Mills' sales for the 4th quarter of 2014 were down 3% compared to sales for the 4th quarter of 2013. Sales declined due to lower volume (-2%) and foreign currency exchange rates (-2%) but were offset by higher prices (1%). Adjusting for foreign exchange rates, sales decreased 1% on a quarter over quarter basis. Sales increased 1% and adjusted diluted earnings per share increased 4% for the full fiscal year. The company is likely to grow sales faster in fiscal 2015 than in fiscal 2014.
Source: General Mills 4th Quarter News Release

General Mills operates in 3 segments:

  • US Retail (73% of operating profits)
  • Convenience Store (17% of operating profits)
  • International (10% of operating profits)

The company expects mid single digit revenue growth in both its US Retail and Convenience Store segments. The International segment is expected to grow revenues in the high single digits.
Source: General Mills 4th Quarter Presentation

The company plans to achieve growth in the US by investing in cereal for growth, returning yogurt to growth, accelerating better-for-you snacking, and sustaining momentum in Hispanic and baking brands.

General Mills' strategy to increase stagnant cereal brand sales is to renovate old cereal brands and leverage popular cereal trends such as protein enhanced cereals and gluten free cereals. In 2010, Chex was rebranded as "gluten free." Since that time, sales of Chex in the US have grown 10% annually. The company's renewed focus on cereal should help it gain market share and increase cereal revenue.

(click to enlarge)
Source: General Mills 4th Quarter Presentation, slide 26

General Mills plans to build on its yogurt momentum with a "taste test" campaign. In the campaign, consumers are asked to taste Chobani yogurt and Yoplait Greek without knowing which is which. General Mills' Yoplait yogurt finished fiscal 2014 on a strong note with May 2014 sales up 10% versus May 2013 sales.

General Mills' better for you snacking options meet customer demand in the growing healthy food category. The company's healthy brand portfolio includes Fiber One, Nature Valley, LARA Bar, and Food Should Taste Good. General Mills is aiming to continue growth in better-for-you snacking with new product innovations such as LARA Bar Granola (gluten free, non GMO), and LARA Bar ALT protein bars.

McDonald's Current Events & Growth Prospects

McDonald's operates 6,719 restaurants and licenses 28,774 additional restaurants over 120 countries. McDonald's franchising model has allowed the company to expand globally at a rapid clip. As a result, the company is geographically diversified. McDonald's generates more revenue in Europe than in the United States.

Region

Revenue

% Total

US

$2,054.10

30.66%

Europe

$2,712.20

40.48%

Asia Pacific/Middle East/Africa (APMEA)

$1,618.80

24.16%

Other

$315.20

4.70%

Source: 2014 First Quarter Report

McDonald's grew constant currency revenues 3% for the first quarter 2014 as compared to the first quarter of 2013. The company is planning to add about 1,000 new restaurants in 2014, which will result in a store count increase of around 3%. In addition, McDonald's will modernize another 1,000 stores in an effort to increase same store sales.

Shareholders of McDonald's can expect long-term growth of around 3% from increasing global store count. McDonald's sales can grow significantly faster if the company can increase same store sales. McDonald's has several options to increase same store sales, including:

  • Better menu layout
  • Product promotions
  • Healthier options
  • New product innovation

McDonald's has a history of being a pioneer in the fast food industry. The company's breakfast menu and coffee products have helped drive growth over the last decade.

McDonald's store count growth opportunity lies with the APMEA division. Emerging markets are quickly growing middle class consumers. McDonald's ability to appeal to emerging market consumers will drive future growth.

Currently, the company is generating almost 1/4 of its sales in the APMEA region. Comparable store sales in APMEA increased 2.9% compared to last year for the first quarter. Total constant-currency adjusted APMEA sales increased 7.5% for the same period. Strong APMEA growth and increased comparable store sales shows McDonald's emerging market expansion model is working well. The company is well positioned to take advantage of its growth opportunities in emerging markets.

Target Current Events & Growth Prospects

70 million Target shoppers' data was stolen in a breach at the end of 2013. The company's sales dropped as customers avoided Target in fears of data loss. Target is switching to chip and PIN technology for its debit and credit cards to mitigate future data breaches. The company is committing $100 million to the upgrade, which will roll out by early 2015.
Source: International Business Times

Target's CEO Gregg Steinhafel recently resigned from the company. Target is currently searching for a new CEO. In the interim Target's CFO John Mulligan will stand in as interim CEO. Gregg Steinhafel's resignation letter stated that "now is the right time for new leadership at Target." A favorable change in CEO could give Target stock a boost, in light of the recent troubles the company has faced under current management.

Target has opened over 100 Canadian locations recently. The Canadian expansion has not gone well. Gross margin in Canadian stores is currently around 18%, and is expected to hit 20% for the second quarter of 2014. For comparison, US store gross margin has been about 30% for the last 4 years. Target must boost Canadian store gross revenue up to at least 25% to reach profitability in Canada. The company is likely several years out from Canadian profitability.
Source: Target First-Quarter Transcript

Target has long-term growth potential despite the company's recent weakness. The data breach and slow Canadian sales do not affect Target's core business model of low-priced goods sold at clean, upscale stores. Both problems are temporary and do not destroy Target's competitive advantage.

Target posted slight US stores revenue growth for the first quarter of 2014 as compared to the first quarter of 2013. This is positive news, as it means the company has nearly completely recovered from the data breach scandal that negatively impacted sales about 7 months ago.

(click to enlarge)
Source: Target Quarterly Store Sales Change

Target is expecting 25% quarter-over-quarter revenue growth in its Canada locations. The company is slowly gaining traction in the Canadian market as gross margins and sales continue to rise. When Target's Canada expansion begins to add to the company's bottom line, Target will see a meaningful boost to its earnings per share.

Source: Target First-Quarter Transcript

Final Thoughts

Target, General Mills, & McDonald's all have strong 10-year growth rates and high dividend yields. General Mills & McDonald's also have low volatility and average payout ratios. Target has fairly high volatility and a high payout ratio. As a result, both General Mills & McDonald's are Top 10 stocks based on the 8 Rules of Dividend Investing, while Target is in the top 40.

Source: 3 Stocks With 3%+ Yields, 6%+ Growth Rates, And Long Dividend Histories