In the investing world, a strong track record means something. The best companies to buy and hold are frequently the ones with the longest track records of rewarding shareholders. While past performance is not a guarantee of future results, a company's ability to stand the test of time is a great sign that an investor's hard-earned money is in good hands.
When it comes to a long history of rewarding shareholders, few companies can match General Mills (NYSE:GIS). General Mills' resume as a dividend payer is incredibly impressive: It's paid uninterrupted dividends for an astounding 116 years in a row.
For income investors who enjoy the slow-and-steady flow of dividend checks each and every quarter, General Mills is a stock you should get to know.
General Mills' rock-solid dividend
General Mills has not only paid a dividend for more than a century, but it's also grown its dividend meaningfully over time. According to the company, General Mills' quarterly dividend has been increased six times in the last five fiscal years. And the dividend has grown at a 12% compound annual rate over that period.
This includes a very recent dividend increase. On March 10, General Mills increased its quarterly dividend from $0.41 per share to $0.44 per share, a 7% increase. This shows that not only does General Mills provide an attractive yield -- approximately 3.3% at its recent stock price -- but its yield is likely to grow over time at a rate that outpaces inflation.
The reason why this company can maintain such a long track record of paying cash dividends to shareholders is its strong business. It has a diverse product portfolio of strong brands that lead their respective categories. For example, while General Mills is most easily recognized as a cereal company with the Cheerios brand, it also owns the Pillsbury, Green Giant, and Betty Crocker brands.
The result is that General Mills' brand portfolio provides the company with lots of free cash flow. During the first two quarters of the current fiscal year, General Mills generated $545 million in free cash flow. In the same period, the company paid $503 million of dividends. Consequently, General Mills' free cash flow payout ratio is 92% over the first half of the fiscal year, which is high. Nevertheless, General Mills' dividend is sufficiently covered with free cash flow, which is a critical test of a company's dividend sustainability.
General Mills won't leave income investors hungry
General Mills has seen growth slow in recent years, which has affected its dividend coverage. Sales were down 2% in the first six months of the fiscal year. But in response to lackluster sales, General Mills acquired Annie's last year for $820 million.
This is a very important step for General Mills, because organics and natural foods are growing much faster than packaged and shelf-stable foods. The acquisition will perfectly complement General Mills' existing portfolio, because the company already has a lineup of organic products that is performing well. This includes the Cascadian Farm, Muir Glen, LARABAR, and Food Should Taste Good brands. Collectively, these brands generated $330 million of sales in the last fiscal year. This represents less than 2% of the company's total sales, so clearly there's a lot of room for General Mills to keep growing in this business.
Annie's generated $204 million of sales in its most recent full fiscal year before the acquisition. Bringing in Annie's will nearly double General Mills' presence in organics. In addition to immediate top-line growth, General Mills expects the acquisition to be accretive to earnings in the first 12 months after the acquisition closes. This growth should help boost future cash flow, which will improve General Mills' ability to continue growing its dividend in the years ahead.