Do Kellogg, Campbell's, and General Mills Have Any Dividend Upside?

Few things are certain in life. Death, taxes, and big dividends from packaged food companies are generally among them.  

Steadily growing cash flows at companies like Campbell Soup (NYSE: CPB  ) , Kellogg (NYSE: K  ) , and General Mills (NYSE: GIS  ) , have always seemed like a given. Investors have been willing to sacrifice growth in exchange for the steady profits, and dividends, that these stocks offer. 

So after rough quarters from all three, and another earnings report approaching from Campbell's, do income investors need to be more cautious?

No sugar coating poor results
This entire packaged goods trio has slumped a bit in recent quarters, but none was quite as bad as Campbell's last quarter. Since Campbell's reports earnings again this upcoming Friday, it's probably best we start by examining this company.

In its first quarter 2014 results Campbell's sales dropped 2%, and earnings sank a staggering 30%, as the soup division in particular was clobbered. As fellow Fool Taylor Muckerman pointed out in this video, the company also has been increasing its marketing costs; combined with declining sales, this may not be a winning recipe for dividend hungry investors. 

One of the few bright spots in Campbell's recent quarter was its snack division, which is what makes Kellogg's recent results so difficult to digest. While Kellogg's full-year results were ok, and its most recent quarter saw a one cent EPS beat, sales were still down 2%. What's odd is that its snack division didn't fair well, and aside from a bounce back in Europe, the breakfast division saw a 4% decline. 

Finally, even General Mills recent quarter left a sour taste in investors' mouths, as the food giant missed expectations on both EPS and revenue. What's worse is that EPS dropped year-over-year $0.03, or 3.5%. Management explained that this was due to the previous years comparable results being abnormally high, which may be, but we still must assess if growth can resume (especially if we expect the dividend to go higher). 

A few bad quarters...or something more?
Campbell's results are much worse than the other two companies, to be fair, and I don't mean to sound the "panic" alarm on any of these businesses. However, while the stock prices are still relatively high, I feel that one important question has not been asked enough about these businesses. 

Here's the question: With consumers becoming more conscious of what they put in their body, are these guys on the wrong side of mega-trend?

Organic groceries' penetration still makes up less than 5% of food sales, but is due to grow at 21%; can these companies adapt in time? While we all question whether Burger King can survive the healthy onslaught of Chipotle, no one seems to ask if a company that sells Pop Tarts has a place at the breakfast table of tomorrow. 

Annie's probably is not going to overtake General Mills because of health food trends, but if it slows it down for a year or two your dividend payment may be stuck in neutral.

These three businesses have, wisely, made a conscious effort to keep their pay-out ratios below 60%. With none of these three businesses are projecting truly robust earnings growth for 2014, do the dividends, and thus the stock price, really have any upside?

Foolish conclusion: more questions than answers
It seems natural that these businesses, with their ample amounts of capital, can just move in on healthy eating trends. After all, Campbell's purchased Plum Organics last year and General Mills banished GMO's from Cheerio's recently.

Yet Campbell's organics division slumped recently, and Kellogg's Special K did as well. Could it be that consumers are looking for their healthy food to be fresher? That's something packaged goods just can't offer.

Over the past few years I've recommended General Mills a couple of times, and I still like the company. I'm not worried that these stocks will drop, but it is fair to ask if they are adapting on time. 

All I know is that what would once be easily classified as a "short-term slump," now requires much more attention. These packaged goods businesses have suddenly become much less boring.

Do these companies have any dividend upside? That's a good question. Unfortunately, there are few clear answers at this point.

Stay tuned.

Dividend investors take note:
Dividend growth may be hard to come by for Kellog General Mills, and Campbell. That's why if you're looking for steady dividend growers that can withstand the test of time, you're invited to check out The Motley Fool's brand-new special report, "The 3 Dow Stocks Dividend Investors Need." It's absolutely free, so simply click here now and get your copy today.


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