Food for Thought: General Mills vs Kellogg

General Mills (NYSE: GIS  )

 

Dividend history
General Mills' current market cap and dividend yield are $33 billion and 3%, respectively. Kellogg's market cap and dividend yield are $24 billion and 2.7%, respectively. We will use the period from 2007 to the present throughout the analysis to get a look at performance during different business cycles. General Mills' compound annual growth rate (CAGR) in dividends from 2007 to 2014 is 9.98% compared to Kelloggs's CAGR of 5.45%. General Mills may have a higher growth rate, but that does not mean it will continue into the future at that rate forever. To see how sustainable each company's dividend is we will look into free cash flow.

Putting that cash to use
Free cash flow is the cash generated through normal business operations after accounting for capital expenditures to upgrade property, plants, and equipment. These cash flows are used to pay dividends and buy back stock. General Mills has a different calender year end than Kellogg, hence the 2014 numbers.

General Mills 2007 2008 2009 2010 2011 2012 2013 2014
FCF (in millions of $'s) $1,291 $1,208 $1,265 $1,531 $878 $1,731 $2,312 $1,878
FCF payout 1.17 1.47 1.24 0.62 1.69 0.51 0.70 1.40
FCF coverage 0.86 0.68 0.81 1.62 0.59 1.97 1.43 0.72
Coverage w/ net borrowing 0.89 1.12 0.86 0.91 0.90 2.16 1.69 1.02
Kellogg 2007 2008 2009 2010 2011 2012 2013
FCF (in millions of $'s) $1,031 $806 $1,266 $534 $1,001 $1,225 $1,170
FCF payout 0.93 1.20 0.48 2.68 1.11 0.51 0.62
FCF coverage 1.07 0.83 2.10 0.37 0.90 1.97 1.62
Coverage w/ net borrowing 0.60 1.00 3.26 1.06 0.86 3.57 1.73

Kellogg's FCF over the period seems quite volatile, but has hovered in a range of $1 billion to $1.2 billion except on two occasions when Kellogg had increased pension expense due to regulatory changes in 2008 and 2010. General Mills FCF has been on an upward trajectory over the period, but also has some hiccups. The drop in 2011 was due to mismanagement of inventory and a decrease in prepaid expenses. Average FCF over the period for General Mills and Kellogg comes in at $1.6 billion and $1.1 billion, respectively. This average excludes 2011 for General Mills and 2008 and 2010 for Kellogg to help normalize the number. This average can give us an idea of the earnings power of both companies over different business cycles. With current market capitalization, we are paying 20.6 times FCF for General Mills and 21.07 times for Kellogg.

When looking at the trend in payouts over the period, Kellogg has kept its own lower than General Mills'. Also, Kellogg has kept its coverage ratio, with and without borrowing, over one more often than General Mills. On multiple occasions Kellogg has a coverage well over 1.5 and above. Given Kellogg's lower growth rate in dividends and payout ratio, its dividend seems more sustainable. It is more feasible to continue with dividend growth of 5.45% for an extended period than 9.98%. 

Measuring long-term returns

ROIC 2007 2008 2009 2010 2011 2012 2013 2014 Average
General Mills 13.4% 13.1% 12.4% 13.5% 13.9% 11.3% 11.7% 12.2% 12.7%
Kellogg 20.6% 19.8% 17.6 17% 12.3% 11.7% 18.3%   16.7%

Kellogg has used its capital more productively for shareholders than General Mills, with a 5% higher average ROIC. To put this in perspective, most investors would be highly satisfied with long-run returns averaging out to 10% per year. Kellogg has returned an average of 16.7% on investors' capital through various market conditions. ROIC for Kellogg was above 10% for the whole period. This is not to say General Mills is poorly run -- General Mills' average ROIC is above 10% as well, but it hasn't been as high as Kellogg's.

Foolish takeaway
Kellogg has given investors outsized returns over multiple kinds of economic environments and has edged out its competitor, General Mills, when looking at dividend sustainability. If investors are looking for a steady dividend-paying company in a stable industry, than Kellogg warrants further review. 

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  • Report this Comment On August 02, 2014, at 9:29 PM, PEStudent wrote:

    Averaging free cash flows over the past 8 years when one has changed less than 17% and one has changed 45% minimizes the 45%'ers, GIS's, growth.

    GIS pays a 3% dividend that represents an easily sustainable 54.5% payout the GIS has increased for 10 straight years. K pay 2.7% that represents a 49% payout which it has increased for 9 straight years.

    Analyst consensus at Yahoo expects GIS to grow eps and average 6.7% annually for the next five years. That plus the dividend means an annual avg. gain of 9.7%. The consensus expects K to grow eps 6.0% and with the dividend that's 8.7%.

    I'll stick with GIS, which has outperformed the S&P so far this year and which jumps 1.6% Friday.

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