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  • In recent years, GIS' payout ratio has gone up quite a bit.
  • I expect the dividend growth rate to be limited to high single digits.
  • General Mills' P/E ratio is well above its 5-year average, implying overvaluation.
  • Short-term balance sheet health is far from perfect with a current ratio of only 0.81.

General Mills (NYSE:GIS) recently dropped down from its 52-week high of $55.64 and is now trading at $50.93. The drop in price per share has pushed the dividend yield up to a very respectable 3.22% at the current rate of $0.41 per quarter.

Average analyst expectations for GIS' earnings per share in the current fiscal year (which ends in May of 2015), stand at $3.01. This would be an increase of 6.4% last year's $2.83. The 5-year average EPS growth rate stands at 8.15%. In its outlook for 2015, the company stated it would start cost saving programs. The expected effect of these savings will be $40 million pre-tax in the current fiscal year, with more cost reductions in fiscal year 2016.

General Mills has a price to earnings ratio of 18.0, while its forward P/E stands at only 16.9. For comparison, Kellogg (NYSE:K), one of General Mills' competitors, is trading at a slightly lower forward P/E ratio of 15.6. Over the past 5 years, General Mills has had an average P/E ratio of 16.0.

GIS' current price to sales ratio is 1.7, which is the same as its 5-year average. Kellogg's P/S ratio is quite a bit lower, at 1.5.

GIS EPS Basic (5-Year Growth) data by YCharts

As we can clearly see from the graph above, GIS' dividend has increased at a far higher pace than its earnings. This has led to a payout ratio that has climbed from only 41.4% in fiscal year 2011 to 54.9% in the most recent twelve months. The 54.9% payout ratio is not extremely high, though I would not expect the company t o increase it much further. Therefore, I will assume the dividend will grow at the same pace as the EPS. This would mean the next dividend increase would put the dividend at $0.44, which at the current price per share would provide us with a yield of 3.46%.

GIS Total Dividends Paid (Annual) data by YCharts

General Mills buys back large amounts of its own shares, which has reduced the number of outstanding shares from 818 million at the end of fiscal year 2005 to only 612 million today. In fact, as we can see from the graph above, in 9 out of the previous 10 years, the company spent more on stock buybacks than on dividends.

GIS Current Ratio (Quarterly) data by YCharts

Looking at the balance sheet, we can see GIS has a current ratio of only 0.81, which is quite low. This reinforces my idea that it would be wise for the company to reduce its payout ratio a bit so debts can be repaid easier. The long-term debt stands at $6.4 billion, which is not extremely high for a company of GIS' size.


Considering that analysts expect General Mills' earnings growth to slow down this year and next year, and the fact the company is trading well above its 5-year average P/E ratio, I won't be buying General Mills right now. Due to the large amounts of money spent on share repurchases and the payout ratio, which has already gone up quite a bit in recent years, I don't expect the dividend to continue growing at the rate it has in recent years. However, I wouldn't recommend selling your shares right now, as the company stated in its most recent quarterly rapport it would focus on reducing costs. If this is successful, earnings growth may return to previous heights.

Disclaimer: I am not a registered investment advisor and do not provide specific investment advice. The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion. It is up to investors to make the correct decision after necessary research. Investing includes risks, including loss of principal.

Source: General Mills: Dividend Growth Rate Will Probably Decline