General Mills (NYSE:GIS) is an iconic name in the packaged food space. However, when I stepped in to buy shares in May of 2018, it was struggling to grow its business. In fact, just a couple of months earlier it had made a massive strategic shift to help with that effort.

I bought shares betting that it was a good move, and the results posted in its second-quarter 2020 earnings report strongly suggest that General Mills has finally proved I made the right call. 

Looking to rev things up

It seems like so long ago now, but in 2018 General Mills was dealing with weak performance in key food categories, including yogurt and cereal (among others). Selling packaged food is usually a slow-growth business, but General Mills was struggling with market share and had missed major industry trends (most notably the rise in popularity of Greek yogurt). The stock had sold off heavily, dropping around 45% between late 2016 and mid-2018 on concerns that the food maker had lost its way.

A woman using her finger to show an up trend and word dividend superimposed in front of her

Image source: Getty Images.

That was when it made an $8 billion bet on the future, buying healthy pet food maker Blue Buffalo. There were concerns that it was overpaying, but management stressed that it was paying a fair price for a growth business. I liked the move and bought in as Wall Street's concerns pushed the share price lower. The story that investors seemed to prefer at the time was cost-cutting, which was the main impetus behind the buyout of Heinz by 3G Capital and Berkshire Hathaway in 2013 and the eventual merger of Kraft and Heinz in 2015 to make Kraft Heinz

My personal corporate experience with cost-cutting is that it can do wonders over the short term and should always be a piece of the puzzle. But you can't cut costs to grow a business, and growth is far more important to the longevity of a company. So General Mills looking to fix its core and add a fast-growing pet food business looked like a winning play to me in the packaged food space.

Waiting pays off

The Blue Buffalo business itself thrived from the get-go, as General Mills used its distribution might to expand the pet food brand into mainstream stores. And it was living up to the company's expectations. The problem was that even General Mills admitted it was a big investment that would take time to financially absorb. Just how big? In 2018 the company's total long-term debt jumped more than 60%. That pushed its financial-debt-to-equity ratio from roughly 0.33 times to around 0.60 times. 

Not surprisingly, debt reduction was a key focus for the company -- so much so that it planned to hold the dividend steady until it was able to get its leverage back down to more normal levels again. I'm a dividend investor, so any adverse dividend decisions from the board are important to me. But I reasoned that this was exactly the right call, a position that Blue Buffalo's performance and the company's steady debt reduction efforts helped support. 

GIS Total Long Term Debt (Quarterly) Chart

GIS Total Long Term Debt (Quarterly) data by YCharts

And, now, with second-quarter 2020 earnings, my patience has been rewarded. COVID-19 has put consumer staples companies like General Mills in a great position since more people staying home has led to more food purchases. In addition, people have been adopting pets in large numbers, further supporting the Blue Buffalo move.

However, the key success I have been looking for wasn't performance-based. I wanted to see General Mills start increasing the dividend again, although it was a move I didn't expect to see during the global pandemic. In fact, I was thinking a dividend hike wouldn't come before 2021 at the earliest even before COVID-19 started dominating the news. But the board proved I was being too conservative as it raised the dividend by 4% this quarter. That's not a huge increase, but it's about right for a packaged food company and is a clear show of strength during a difficult economic period. 

Slow and steady dividend growth

Still, the most important takeaway for me is that the dividend hike validates my original thesis. To be fair, not all of General Mills' business divisions are doing well today (convenience store sales are way off, as you might expect with people stuck at home), but it is doing fairly well overall. And it has now moved beyond the Blue Buffalo acquisition on a financial level. While I'm not planning on selling General Mills anytime soon, I am quite pleased to be able to count the company as a dividend grower again.