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 (GIS 1.93%) 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 (K 1.49%) 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) 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 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) 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:
- General Mills projects low single-digit sales growth fueled by a pipeline of innovative products.
- General Mills continues to add new product lines and varieties to attract consumers.
- The global organic food and beverage market is expected to grow to $188 billion by 2019.
- General Mills hopes to drive Fiber One and Nature Valley sales by adding supplementary protein.
- General Mills recently introduced Nibblr, a snack delivery service for homes or offices.
Kellogg opportunities:
- Kellogg boasts a pipeline of "natural" foods such as Bear Naked granola, Krave, and Kashi cereals.
- Kellogg plans to cut costs by between $1.2 billion and $1.4 billion with its Project K restructuring program.
- Kellogg's $2.7 billion acquisition of Pringles makes it one of the world's largest snack companies.
General Mills threats:
- Global agricultural production should grow by an anemic 1.5% annually for the rest of the decade.
- Production shortfalls coupled with surging global demand continues to drive up commodity prices up.
Kellogg threats:
- General Mills' reformulated GMO-free Cheerios is an early effort to lure health-conscious customers from Kellogg's "healthy" breakfast brands.
- Consumers are switching to healthier eating habits focused on natural and organic food.
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!
