The last time I wrote about General Mills (GIS) was almost two years ago. At the time, I warned that the global shift toward healthier food choices could cause severe headwinds for the company. I noted that GIS was making a lot of changes to their messaging about how healthy their products were (or, rather, how they weren't necessarily unhealthy), but I also pointed out that these and other changes could take a long time to have any material effect on the stock or its revenues. That came true, and between the time of my last article and this one, the stock has gone through a stomach-churning ride, dropping to levels it hasn't seen in nearly 10 years. Since the end of 2018, however, the stock has regained some of its wind and is now trading at around the same level as when I last covered it in November 2017. The rally of 2019 has been phenomenal at more than 40%.
This time, I'm looking at the stock as a dividend play with a lot of resilience against being pushed back down to those lows it hit at the end of 2018. To be clear, I'm not suggesting that the stock has much of an upside; in fact, it might be prudent to wait for Q2 2019 results to come out later this month. That being said, I think the dividend yield is well worth investigating for sustainability and growth potential.
Organic Revenue Growth
There's still no sign of healthy organic growth in General Mills' largest operating segment, North America Retail. Annual net sales were actually down from $10.1 billion in fiscal 2018 to $9.9 billion for FY 2019. Not only is this segment the company's highest earner, but it is also the most operationally profitable one. In fact, you can see the effect of that on the overall operating margin, which was reported at 14.9% compared to 15.4% in FY 2018.
Source: FY 2019 Annual Report
That's not a good sign, because one of the things I brought to the forefront nearly two years ago was that organic sales were weak. That hasn't changed despite the acquisition that promised a lot of accretive benefits at the time. The acquisition did add $1.4 billion to the company's top line in 2019; the only problem is that organic growth is yet to be seen in other segments, especially the core North America Retail segment.
Source: FY 2019 Annual Report
The problem is further exacerbated by the risk of lower traffic at the stores of its key customers in the Pet segment, PetSmart and Petco (PETC), which represent a combined 50% of the segment's revenue:
"National pet superstore chains have experienced reduced store traffic. If national pet superstore chains continue to experience reduced store traffic, or experience any operational difficulties, our Pet segment operating results may be adversely affected." - FY 2019 Annual Report
That said, we're looking at the stock from a dividend safety and sustainability POV, and revenue numbers, though nothing to envy, look relatively stable for the foreseeable future. Come Q1 2020 earnings, though, watch for a drop in price. Much of the 7% gain since the last earnings call came from the company beating market expectations on EPS. This time, the market might be a little too optimistic, as pointed out by SA contributor D.M. Martins Research in an article published last week. I would tend to agree based on the fact that net sales for Q1 2019 grew 9% on a year-over-year basis to hit $4.1 billion. I don't see that kind of growth happening again in Q1 2020. On the bright side, it could open up a better entry point for dividend investors. The consensus target price already shows a 3.5% downside to the current price of $54.59 as of this writing.
General Mills has been paying dividends for the past 30 years, with three 2:1 stock splits during that time. The current annual payout per share is $1.96 for a forward yield of 3.6%. That's quite an attractive payout, but dividend growth rates have been slowing down of late, coming in at a 10-year CAGR of 9% and a 3-year CAGR of 4.25%. In FY 2019, the company paid nearly $1.2 billion in cash dividends. At that level, the payout ratio is about 66%. The company is quite heavily leveraged; the Blue Buffalo acquisition increased debt load by $6 billion, pushing net debt to EBITDA ratio to 4.7x, which has subsequently come down to 3.9x.
I don't see any reason why that should change in the foreseeable future. Admittedly, the future doesn't look too bright because of various macroeconomic factors, not the least of which is the current trade tariff situation between the U.S. and China. General Mills is also dependent on a few large retailers for a significant portion of its revenues; Walmart (WMT) accounted for nearly a third of North America Retail revenues in FY 2019, and we've already seen the situation with pet products. That's definitely something to keep in mind.
From a dividend investment perspective, however, the company looks like a safe bet even though there's a caveat not to expect significant dividend growth in the short to medium term.
The stock is trading 25% lower than its 3-year high of around $72. It might never hit that level unless another key acquisition came along, but looking at the current debt level, I suspect it will be a while before General Mills announces another big-ticket acquisition. I would advise potential investors or those looking to add to their position to wait until Q1 2020 earnings are out. If there's a drop in stock price on the back of revenue or earnings misses, it will lower your cost basis. If not, you can still add to or open a position in the knowledge that your dividends will be safe for the foreseeable future.
While the lack of organic growth and margin pressure are certainly points of concern, GIS is a solid fallback stock should the economy take a turn for the worse. In uncertain times such as this, it's probably a good idea to have your portfolio balanced by a relatively safe dividend stock like this one.
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.