General Mills (GIS -0.77%) has managed to put up some impressive financial results recently. But when the food producer reported its latest earnings (for its fiscal 2023 fourth quarter), investors were focused more on the future than the past -- so much so that a big dividend increase got lost in the mix. General Mills has some other notable strengths as well that long-term investors shouldn't ignore. Let's take a closer look.
What happened and what's to come
Inflation has been running hot, leading food companies like General Mills to raise prices. If you've been to a grocery store lately, you know exactly what's been going on since your dollars aren't going quite as far as they used to not so long ago. Effectively, General Mills has been attempting to offset the margin squeeze it has faced as costs for ingredients, packaging, employees, and logistics have been on the rise.
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To put some numbers on it, the company's gross margin fell 110 basis points in fiscal 2023 even as it increased organic sales by 10%. The organic sales, meanwhile, led to a modest reduction in volume as consumers bought less product because of the higher prices. This is all pretty typical stuff today and, frankly, for the food industry historically. Over time the company should be able to pass rising costs on to consumers.
The issue that seems to worry investors from the company's earnings is its fiscal 2024 outlook. For starters, the company said inflation will be less of an issue but still one that is a worrying headwind (input cost inflation is projected to drop to 5%, which is still notable). So more price increases could be in order, which could lead to further volume declines.
Second, it looks like consumers are less and less willing to pay more. That's highlighted by the 4% volume decline for the full year versus a much larger 6% decline in the fourth quarter. Further, organic sales increased 10% for the full fiscal year but only 5% in the final stanza of the year. The outlook for organic sales in fiscal 2024 is for growth of between 3% and 4%, suggesting a further slowdown ahead.
At this point, it looks like fiscal 2024 won't be as good as fiscal 2023 in many important ways. Since Wall Street is forward-looking, that bit of news got most of the attention.
A big rise
And yet, as noted, inflation is a normal issue for consumer staples companies. There is a playbook, and General Mills is running it. Unless this time is truly different, the company will muddle through this difficult period just like it has many times before in its 100-plus years.
What investors should probably pay more attention to is the huge 9% dividend increase that was announced along with earnings. That was up from the 6% hike in the previous year, suggesting that management and the board see a bright future ahead. Notably, the company has paid a dividend in each of the 95 years it has been public. Although it hasn't increased the dividend every year over that span, it has never cut the dividend.
Step back and think about that streak. A company has to do something right to achieve results like that. Moreover, given the lack of dividend cuts, it is unlikely that the board would suddenly decide to risk a cut now by increasing the dividend to an unsustainable level.
Now couple the dividend news with an investment-grade-rated balance sheet. Over the past three years, the company has increased its times-interest-earned ratio (which tracks how well a company can afford its interest costs) from around 5 to over 9. Simply put, General Mills looks like it is in better financial shape today than it was before inflation started to hit the business.
Think and act long term
If you are a long-term dividend investor, you need to think beyond the next quarter or year -- you need to think in decades. That way, you can benefit from the compounding power of business growth and dividend increases like the huge 9% hike General Mills just gave to shareholders. (Think about that for a second; next year, investors will collect nearly 10% more dividend income from this stock.)
Yes, inflation is an issue, and it will remain one in fiscal 2024, but that's unlikely to derail the long-term success this company continues to achieve.
