Many dividend payers talk the talk when it comes to valuing shareholders. But not as many companies prove their commitment with steadily growing dividends paid to shareholders.
Minnesota-based consumer staples giant General Mills (GIS -0.77%) arguably talks the talk and walks the walk in creating value for shareholders. The company just announced that its quarterly dividend per share payment of $0.59, payable on Aug. 1 to shareholders of record as of July 10, would be 9.3% higher than its previous dividend.
Such an emphatic increase in its payout brings the following question to mind: Should income investors buy General Mills' stock? Let's examine the company's fundamentals and valuation to reach a conclusion.
Popular brands bode well for the future
With a product portfolio made up of over 100 brands, General Mills sells everything ranging from breakfast foods to desserts, and ingredients to pet food. The company's most prominent brands include Chex breakfast cereal, Yoplait yogurt, and Totino's pizzas.
| Metric | Q4 2022 | Q4 2023 |
|---|---|---|
| Organic net sales growth rate (YOY) | 13% | 5% |
| Net margin | 13.9% | 13.4% |
Data source: General Mills. YOY = year over year.
Net sales edged upward by 2.8% over the year-ago period to $5 billion during the fiscal 2023 fourth quarter, ended May 28. What was behind this modest top line growth?
General Mills' products have become a regular fixture in the daily routines of millions of people around the globe. This is why even with big price hikes to keep up with rising costs, only some pushback from customers was encountered. General Mills' organic volume fell by just 6% in the latest quarter. Along with the respective 1% headwinds that the company faced from unfavorable foreign currency translation and divestitures, this explains its net sales growth for the quarter.
The company's non-GAAP (adjusted) diluted earnings per share (EPS) of $1.12 during fiscal Q4 were unchanged over the year-ago period. But when accounting for the strength of the U.S. dollar, the company's currency neutral adjusted diluted EPS was up by 1%.
Because General Mills' cost of sales and selling, general, and administrative expenses grew faster than net sales, its non-GAAP net margin contracted in the quarter. The company's reduced profitability was only partially countered by a lower share count, which is why adjusted diluted EPS growth lagged net sales growth for the quarter.
As General Mills expands its business through acquisition activity and profitability recovers with retreating inflation, the growth outlook is solid. Analysts believe that the company's adjusted diluted EPS will grow by 7.1% annually through the next five years.
Image source: Getty Images.
Expect more of the same dividend growth
In comparison to the S&P 500 index's 1.6% dividend yield, dividend investors can satisfy their appetite for income with General Mills' 2.7% payout. In even better news, it doesn't look as though investors need to sacrifice much growth potential for that high starting income, either.
With its new quarterly dividend per share, General Mills' dividend payout ratio is set to clock in at around 53% for fiscal year 2024. This gives the company the necessary capital for acquisitions, debt reduction, and share repurchases. Coupled with its high- single-digit annual earnings growth prospects, that's why I anticipate dividend growth like its most recent dividend hike for the foreseeable future.
An enticing valuation for a blue chip stock
As the broader market has rallied, shares of General Mills have retreated 8% so far in 2023. This has pushed General Mills' forward price-to-earnings (P/E) ratio down to just 17.2, which is below the packaged foods industry average of 18.9. That is why the stock could be a great buying opportunity for dividend investors at the current $77 share price.
