General Mills, Inc. (GIS), Campbell Soup Company (CPB): A Shiny Dividend in Your Cereal Box

With iconic brands such as Cheerios, Betty Crocker, Lucky Charms, Gold Medal, Yoplait, and Pillsbury, General Mills, Inc. (NYSE:GIS) been able to generate robust cash flows over the years. The company has increased its revenue by 60% since 2003 while earnings have more than doubled. The dividend has also more than doubled in the last ten years, and the company recently announced a 15% quarterly dividend increase effective later this year. This marks 114 years of dividend payments without a single interruption or reduction, an enviable record. After the increase the projected dividend yield sits around 3.2%. Should General Mills be part of your dividend-focused portfolio?

An above average yield

The recent dividend increase has put General Mills, Inc. (NYSE:GIS)’ dividend at the top of the heap among other large packaged food companies, namely Kellogg Company (NYSE:K) and Campbell Soup Company (NYSE:CPB).

General Mills and Kellogg are the two largest cereal companies in the US, while Campbell Soup Company (NYSE:CPB) competes with General Mills, Inc. (NYSE:GIS)’ Progresso brand of soups. Before the dividend increase all three companies had very similar dividend yields, but that increase has pushed General Mills well above the competition.

Growing dividends

Equally important to the yield is the growth rate of the dividend. While the past is not necessarily an indication of the future, it’s useful to examine the record of dividend increases for each company. For the sake of consistency I’ve used the date of declaration to categorize dividends by year, not the date of actual payment.

Dividend data for GIS, K, and CPB

On an annualized basis since 2003 General Mills, Inc. (NYSE:GIS) has grown its dividend at a rate of 10% per year. This eclipses both Kellogg’s growth rate of 6.2% and Campbell Soup Company (NYSE:CPB)’s growth rate of 7% handily, and is even higher factoring in the recent 15% dividend increase. In 2013 General Mills is set to pay $1.47 in dividends, raising the annualized rate to about 10.3% since 2003.

What the future holds

Clearly, in terms of both yield and past growth General Mills is by far the winner among these three companies. One last thing to look at is how much of the free cash flow is dedicated to dividends, the so-called payout ratio. This will give us a clue as to whether or not past growth rates can be sustained in the future.

Except for an outlier year for both General Mills and Kellogg all three companies maintain payout ratios right around 50% on average. For all three companies it seems that future dividend growth will come mainly from earnings growth, since the payout ratio is unlikely to expand considerably in the future. Given that General Mills has maintained this 50% payout ratio consistently I would suspect that the dividend growth over the next ten years will be similar to the dividend growth over the past ten years, maybe not 10% but certainly in the high-single digits. This makes General Mills, with a higher yield and a higher growth rate than both Kellogg and Campbell Soup Company (NYSE:CPB), the best dividend stock of the bunch.

Is General Mills a buy?

To determine whether General Mills, Inc. (NYSE:GIS) stock is reasonably priced I’ll use the dividend discount model to determine what 10-year growth rate is necessary to justify the current market price of around $47.70 per share. Since we know that 2013 will see an increase of about 13.5% in the annual payout, this can be included in the calculation. The results using my dividend valuation tool are shown below.

General Mills needs a ten-year dividend growth rate of about 9.355% for the stock to be fairly valued, slightly below the historical 10-year growth rate. This suggests that the stock is fairly valued, not a screaming bargain but a solid dividend stock nonetheless.

The bottom line

I expect General Mills, Inc. (NYSE:GIS) to be able to roughly maintain its historical dividend growth rate into the future, and under this assumption the stock looks fairly valued – you get what you pay for. Both Kellogg and Campbell Soup Company (NYSE:CPB) have both lower yields and lower growth rates, making those stocks significantly overvalued with respect to the dividend. Of the three, General Mills, Inc. (NYSE:GIS) is the clear choice, although after a run-up in the stock price over the last two months waiting for a pullback would make the dividend even more attractive. Regardless, General Mills is a good choice for any dividend-focused portfolio.

The article A Shiny Dividend in Your Cereal Box originally appeared on Fool.com and is written by Timothy Green.

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