Friday, January 30, 2015

Stock Analysis of General Mills (GIS)


General Mills, Inc. (GIS) manufactures and markets branded consumer foods in the United States and internationally. This dividend achiever has managed to increase distributions to its shareholders for 11 years in a row.

The most recent dividend increase was in March 2014, when the Board of Directors approved an 8% increase in the quarterly dividend to 41 cents/share.

The company’s largest competitors include Nestle (NSRGY), Kellogg (K) and Danone (DANOY).

Over the past decade this dividend growth stock has delivered an annualized total return of 11.40% to its shareholders. Future returns will be dependent on growth in earnings and dividend yields obtained by shareholders.


The company has managed to deliver a 7.50% average increase in annual EPS over the past decade. General Mills is expected to earn $3.01 per share in 2015 and $3.22 per share in 2016. In comparison, the company earned $2.83/share in 2014. 

The company has utilized share buybacks in order to reduce the number of shares outstanding from 818 million in 2005 to 632 million in 2014.

The annual dividend payment has increased by 10.90% per year over the past decade, which is much higher than the growth in EPS. Future growth in dividends will be much lower than that however, likely around 7% - 8% annually, and will be limited by the growth in earnings per share.

A 7.50% growth in distributions translates into the dividend payment doubling every nine and a half years on average. If we check the dividend history, going as far back as 1987, we could see that General Mills has managed to double dividends almost every nine years on average. 

In the past decade, the dividend payout ratio has increased from 40.30% in 2005 to 54.80% by 2014. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings. 

General Mills has also managed to generate a high return on equity, which also increased from 22.50% in 2005 to 27.60% in 2014. I generally like seeing a high return on equity, which is also relatively stable over time. 

Currently, General Mills is attractively valued at 17.80 times forward earnings and yields 3.10%. I am slowly building my position in the stock, and have been doing so this year. I have also sold some long-dated puts on the company, which have 50/50 odds of being exercised.

Full Disclosure: Long GIS, NSRGY and K

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