How Safe Is General Mills' Dividend?

Summary

• General Mills has one of the highest dividend yields among the Dividend Achievers Index.
• Because of this as well as the company's poor revenue performance, some investors have questioned the safety of General Mills' current dividend payment.
• In this article, we perform a deep dive on the company's dividend safety by looking at earnings, free cash flow, recession performance, and debt (including an interest rate stress test).

General Mills (NYSE:GIS) has one of the highest dividend yields among the Dividend Achievers Index and, more broadly, among the entire consumer staples sector. The company's stock is used by many dividend investors to increase the yield of their investment portfolios.

Unfortunately, General Mills' high dividend yield combined with recent poor revenue performance has led some investors to question the sustainability of its current dividend payment.

In this article, we perform a deep dive into General Mills' dividend safety. If you prefer learnings through videos, you can watch a video analysis on the topic below:

Business Overview

To begin, let’s talk about General Mills’ business model. General Mills is a package foods conglomerate that owns more than 100 brands and operates in more than 100 countries. The company’s most well-known brands include Cheerios, Wheaties, Total, Chex, Betty Crocker, Annie’s, Yoplait, and Haagen-Dazs. General Mills trades with a current market capitalization of $25 billion.

General Mills is a well-known dividend stock because of its compelling track record of dividend growth. With 14 years of consecutive dividend increases, General Mills is a member of the Dividend Achievers, a group of dividend stocks with more than 10 years of rising dividends.

Looking ahead, General Mills’ high dividend yield combined with its lack of revenue growth has led some investors to question the safety of its future dividend payments. For the remainder of this article, we will discuss the company’s current dividend safety from four perspectives:

• it’s dividend safety in the context of its current earnings
• its dividend safety in the context of its current free cash flow
• its dividend safety in the context of its recession performance
• its dividend safety in the context of its current debt load.

General Mills’ Dividend Safety Relative to Earnings

First, let’s discuss General Mills’ dividend safety in the context of the company’s current earnings.

When General Mills reported first quarter financial results on September 18^th, the company provided reaffirmed its full-year fiscal 2019 outlook. General Mills continues to expect adjusted diluted earnings-per-share to “range between flat and down 3 percent from the base of $3.11 earned in fiscal 2018.” This guidance implies 2019 earnings-per-share between $3.02 and $3.11 for a midpoint of $3.07.

For context, General Mills currently pays a quarterly dividend of $0.49 per share, which implies a payout ratio of 64% using the midpoint of General Mills’ 2019 financial guidance.

Using earnings, General Mills’ dividend appears very safe for the foreseeable future.

General Mills Dividend Safety Relative to Free Cash Flow

Many analysts believe that comparing a company’s dividend payments to its free cash flow is a better method for assessing dividend safety. Accordingly, we will now compare General Mills’ current dividend payment to its free cash flow.

In the first quarter of fiscal 2019, General Mills generated $607 million of cash from operating activities and spent $113 million on capital expenditures for free cash flow of $494 million. For context, the company paid $294 million of dividends during the same time period for a free cash flow payout ratio of 60%.

Looking out over a longer time frame, our conclusion is the same. General Mills generated $2.8 billion of cash from operating activities during fiscal 2017 and spent $622 million on capital expenditures during the same time period for free cash flow of $2.2 billion. The company distributed $1.1 billion of common share dividends during the same fiscal year for a free cash flow payout ratio of 50%.

Using free cash flow, our conclusion is the same as when we used earnings to measure General Mills’ dividend safety. The company’s dividend appears safe for the foreseeable future.

General Mills’ Dividend Safety Relative to Recession Performance

Companies do not cut their dividends in the good times. Instead, dividends are reduced when companies experience financial difficulties. Accordingly, this section will analyze General Mills’ current dividend safety in the context of the company’s historical recession performance.

We believe that the best way to measure a company’s recession resiliency is by measuring its earnings-per-share performance during the financial crisis that occurred between 2007 and 2009. General Mills’ performance during this time period is shown below:

• 2007 adjusted earnings-per-share: $1.59
• 2008 adjusted earnings-per-share: $1.76
• 2009 adjusted earnings-per-share: $1.99
• 2010 adjusted earnings-per-share: $2.30
• 2011 adjusted earnings-per-share: $2.48

General Mills was able to grow its earnings-per-share during each year of the last major economic contraction. Accordingly, we have no concerns about the company’s ability to pay rising dividends during future economic contractions.

General Mills’ Dividend Safety Relative to Its Current Debt Load

The last angle that we will use to assess General Mills’ current dividend safety is by looking at the company’s current debt level. More specifically, we will see how much the company’s weighted average interest rate will need to increase before the company’s free cash flow will no longer cover its dividend payment.

In General Mills’ most recent 10-K, the company disclosed that it generated $389.5 million of gross interest expense from a debt base that totalled $15.8 billion. This implies a weighted average interest rate of 2.5%.

The following changes show how changes to General Mills’ weighted average interest rate would impact its dividend safety, as measured by free cash flow:

Source: Sure Dividend Calculations

As the image shows, General Mills’ weighted average interest rate would need to rise to approximately the 10% level before its dividend would no longer be covered by free cash flow. Accordingly, we believe that General Mills’ debt level is unlikely to impact the safety of its dividend moving forward.

Final Thoughts

General Mills' recent revenue performance combined with its high dividend yield has led some investors to question the safety of its future dividend payments.

In this article, we examined the company's dividend safety relative to its earnings, free cash flow, recession performance, and debt levels. We concluded that General Mills' dividend is currently covered by fundamentals, and we have no concerns about its ability to fund its dividend for the foreseeable future.

Analyst’s Disclosure: I/we 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.