The true test for whether a stock is worthy of a place in the portfolio of an income investor is how it fares on the brink of a recession. Richard Kelly, the head of global strategy at Toronto-Dominion Bank's TD Securities, believes that the odds of the U.S. falling into a recession by next year are more than 50%.
Yet the consumer defensive General Mills (GIS 0.68%) announced a 5.9% increase in its quarterly dividend per share to $0.54 last month. This is a sign of confidence from management that the company's future outlook is bright. Here are three reasons why income investors should think about adding General Mills to their portfolios.
1. General Mills consistently surpasses expectations
General Mills reported its results for the fourth quarter ended May 29. The company once again topped the analyst consensus for both net sales and non-GAAP (adjusted) diluted earnings per share (EPS) in the quarter.
The consumer staple recorded $4.9 billion in net sales for the fourth quarter, which was an 8.1% growth rate over the year-ago period. This also came in slightly higher than the $4.8 billion that analysts were forecasting for the quarter. How did General Mills exceed the analyst net sales consensus for the eighth quarter out of the last 10 quarters?
The company's organic net sales surged 13% higher in the fourth quarter of its fiscal year 2022. Organic volumes were only down 2% in the fourth quarter, while organic price and mix contributed 14% to net sales growth. This suggests that General Mills' brands have tremendous pricing power. The divestiture of its yogurt business in Europe and dough divestitures in Israel and Europe led to a 4% decline in the company's net sales base. And unfavorable foreign currency translations resulting from global currencies weakening against the U.S. dollar reduced net sales by 1%.
General Mills posted $1.12 in adjusted diluted EPS for the fourth quarter, which was up 23.1% year over year. This trounced the analyst earnings consensus of $1.01 for this time period. And it was the eighth quarter out of the past 10 quarters that the company has done so.
Aside from its higher net sales base, General Mills' non-GAAP net margin expanded 150 basis points over the year-ago period to 13.6%. Along with a 1.1% decline in the company's average outstanding share count, this explains how earnings growth came in ahead of net sales growth in the fourth quarter.
2. The dividend boost is a sign of optimism
General Mills can provide yield-hungry investors with a 3% dividend yield, which is nearly double the S&P 500 index's 1.6% yield. And the company should be able to deliver plenty more raises like its most recent one in the years ahead.
This is because, for one, analysts are projecting 4.8% annual earnings growth over the next five years. Not to mention that General Mills' dividend payout ratio will be 54% for its current fiscal year. This allows the company to retain about as much cash as it is paying out to shareholders. It should be enough for share repurchases, debt repayment, and acquisitions to drive adjusted diluted EPS higher over time. And it gives the company flexibility to grow its dividend slightly ahead of its earnings for the foreseeable future, making it a safe dividend stock for investors.
3. A valuation that appears to be fair
General Mills is a fundamentally strong company. While the broader financial markets have tanked this year, the consumer staples stock has gained 8% so far in 2022.
Yet the valuation doesn't appear to be excessive for its quality. This argument is supported by General Mills' forward price-to-earnings (P/E) ratio of 18.2, which is slightly below the consumer staples sector average forward P/E ratio of 20.1.