General Mills, Inc. vs. Kellogg Company: Which Stock's Dividend Dominates?

Two of your favorite breakfast-making companies square off in a battle of dividend fundamentals.

Apr 5, 2014 at 7:30AM

Dividend stocks outperform non-dividend-paying stocks over the long run. It happens in good markets and bad, and the benefit of dividends can be quite striking -- dividend payments have made up about 40% of the market's average annual return from 1936 to the present day.

But few of us can invest in every single dividend-paying stock on the market, and even if we could, we're likely to find better gains by being selective. Today, two of the world's most popular breakfast companies (both also produce a diverse range of other packaged foods) will square off in a head-to-head battle to determine which offers a better dividend for your portfolio.

Tale of the tape
Founded in 1866, General Mills (NYSE:GIS) is one of the world's leading manufacturers and marketers of consumer food products. The company's product portfolio includes more than 100 world-famous brands, including Cheerios, Yoplait, Betty Crocker, Pillsbury, Haagen-Dazs, Gold Medal, and more. Headquartered in Minneapolis, General Mills manufactures and markets its products in more than 130 countries or territories through several wholly owned subsidiaries and joint ventures around the world. General Mills is perhaps most famous for its many ready-to-eat cereals, which are sold in retail stores around the world.

Founded in 1906, Kellogg Company (NYSE:K) is one of the world's largest producers of cereals, snacks, and frozen foods. The company boasts a world-famous branded consumer product portfolio that includes Corn Flakes, Frosted Flakes, Corn Pops, Rice Krispies, Eggo waffles, and Nutri-Grain, among many others. Headquartered in Battle Creek, Mich., the company operates manufacturing facilities in over 35 countries and markets products in more than 180 countries worldwide. Kellogg has continued to expand its market reach through a combination of product innovation and acquisitions over the years, a strategy that includes the recently completed acquisition of the Pringles business from Procter & Gamble.

Metric

General Mills

Kellogg

Market cap

$31.3 billion

$22.3 billion

P/E ratio

18.7

12.5

Trailing-12-month profit margin

9.9%

12.2%

TTM free cash flow margin*

10.5%

7.9%

Five-year total return 

142%

91.8%

Source: Morningstar and YCharts.
*Free cash flow margin is free cash flow divided by revenue for the trailing 12 months.

Round one: endurance (dividend-paying streak)
General Mills is one of investors' favorite dividend stocks, as this dividend achiever has maintained uninterrupted payouts since 1898. Kellogg has paid dividends for over nine consecutive decades since its first distribution in 1925, but this falls short of General Mills' 115-year streak.

Winner: General Mills, 1-0

Round two: stability (dividend-raising streak)
According to Dividata, General Mills has increased its quarterly dividend payouts at least once each year since 2004. Kellogg had been boosting its payouts every year from 1960 and 2001, but it kept payouts unchanged from 2002 through 2004, Kellogg's streak only begins in 2005, which makes it a year too late to claim this title. Sorry, Kellogg!

Winner: General Mills, 2-0

Round three: power (dividend yield)
Some dividends are enticing, but others are merely tokens that barely affect an investor's decision. Have our two companies sustained strong yields over time? Let's take a look:

GIS Dividend Yield (TTM) Chart

GIS Dividend Yield (TTM) data by YCharts.

Winner: General Mills, 3-0

Round four: strength (recent dividend growth)
A stock's yield can stay high without much effort if its share price doesn't budge, so let's take a look at the growth in payouts over the past five years.

GIS Dividend Chart

GIS Dividend data by YCharts.

Winner: General Mills, 4-0

Round five: flexibility (free cash flow payout ratio)
A company that pays out too much of its free cash flow in dividends could be at risk of a cutback, particularly if business weakens. We want to see sustainable payouts, so lower is better:

GIS Cash Dividend Payout Ratio (TTM) Chart

GIS Cash Dividend Payout Ratio (TTM) data by YCharts.

Winner: General Mills, 5-0

Bonus round: opportunities and threats
General Mills wins a rare clean sweep today on the basis of its history, but investors should never base their decisions on past performance alone. Tomorrow might bring a far different business environment, so it's important to also examine each company's potential, whether it happens to be nearly boundless or constrained too tightly for growth.

General Mills opportunities:

Kellogg opportunities:

General Mills threats:

Kellogg threats:

One dividend to rule them all
In this writer's humble opinion, it seems General Mills has a narrow edge in the fight for long-term outperformance thanks to a strong pipeline of new and innovative products, including early efforts at GMO-free cereal that hint at an eventual push for the growing health-food market. The company's Nibblr delivery service, and its protein-enriched products, could also encourage consumer demand in the highly competitive processed-food industry.

On the other hand, Kellogg has been trying to shield itself from the GMO controversy with its own line of GMO-free cereal flavors under the Kashi brand. Kellogg's ongoing restructuring program should also make a big difference on the bottom line over the long run -- but in the end, it's stronger growth, not greater operational efficiencies, that makes for the best long-term investments. You might disagree, and if so, you're encouraged to share your viewpoint in the comments box below. No dividend is completely perfect, but some are bound to produce better results than others. Keep your eyes open -- you never know where you might find the next great dividend stock!

Nine rock-solid dividend stocks you can buy today
One of the secrets that few finance professionals will openly admit is the fact that dividend stocks as a group handily outperform their non-dividend paying brethren. The reasons for this are too numerous to list here, but you can rest assured that it's true. However, knowing this is only half the battle. The other half is identifying which dividend stocks in particular are the best. With this in mind, our top analysts put together a free list of nine high-yielding stocks that should be in every income investor's portfolio. To learn the identity of these stocks instantly and for free, all you have to do is click here now.

Alex Planes has no position in any stocks mentioned. The Motley Fool recommends Procter & Gamble. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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