Why General Mills, Inc. Keeps Increasing Its Dividend

General Mills (GIS -1.09%)in its own quiet and unobtrusive way, hasn't done badly over the past few years. Enough to keep raising its dividend, at any rate, most recently by 5%.

In this segment of the MarketFoolery podcast, Chris Hill and Bill Barker talk about what General Mills does (it's not all cereal, by the way) and how it's able to keep increasing that dividend and buying back shares. They also discuss how the apparent decline in cereal consumption is affecting the company. 

A transcript follows the video.

This podcast was recorded on March 9, 2016.

Chris Hill: Let's move on to General Mills. The company has announced it is increasing its quarterly dividend by 5%, which seems like just one more reason to buy this stock, which has rather quietly done well over the past couple of years. If you think of certainly the last year, the stock's up about 20% compared to a market down around 6% or so. And, we were chatting about this earlier this morning, because when I hear General Mills, I immediately think of cereal. And these are the people who make Cheerios and other cereals as well, but Cheerios are the first ones that come to mind. And, your colleague, Bryan Hinmon, quickly pointed out that, "Hey, General Mills has a lot more going on than just cereal." And he's right. All manner of packaged foods coming out of General Mills. Is this a stock that... I don't know, it seems like a quiet, boring stock. But certainly, over the past couple years, it's done quite well.

Bill Barker: It's quite a boring stock with some pluses and some minuses. It is not really growing total sales very much. It's a pretty flat story over the last three years in sales. It's flat over a longer period of time in terms of real profits. Nevertheless, we're talking about it because it's raising its dividend, which it does, basically, every four quarters, it raises its dividend. It's raising it $0.02 per share, which is less than the previous four or five annual dividend raises, which makes sense, because they're not really growing their earnings fast enough to grow the dividend more than that.

The payout ratio is already, it was 83% last year, so, they're taking most of their profits and giving them back to shareholders directly in the form of dividends. They've also been buying back some shares. So, what earnings-per-share growth you're seeing in this company, of late -- and of late, I mean, last half decade -- has mostly been buying back shares.

So, that's kind of the bad news. It is sleepy, it's not moving forward dramatically like a lot of stocks we would tend to talk about here, which have more interesting ups and downs. There are no real downs here. It hasn't had a down year on a total return level -- that's both a stock price movement and the dividend -- in over ten years. So, people own it for stability. It's consumer staples. Things don't change rapidly in the cereal market, although we can talk about what's on the horizon for cereal. And, they diversify into so many other things, pizza and...

Hill: Soup.

Barker: Soup.

Hill: Progresso.

Barker: Yoplait yogurt. Frozen foods, they've got Pillsbury, they've got a lot of brands here, there are a lot of places they are, they're all over the store aisle, and that gives them a great deal of stability.

Hill: Yeah, there was that story recently about how Millennials aren't eating breakfast cereal because it's too hard (laughs). Because it involves cleaning up dishes. And I just remember reading that and thinking, "I'm not digging into whether any science or surveys are actually happening in this, but that just strikes me as slightly absurd."

Barker: Not to make fun of chronic fatigue syndrome, which is a real thing.

Hill: It is a real thing.

Barker: But this sounds like an entire generation that is bucking for chronic fatigue syndrome.

Hill: That's what is sounded like. Or just flat-out laziness.

Barker: "I just can't put the dishes in the dishwasher. Because then you have to open it, you've got to roll the tray out...

Hill: Put the clean dishes back in the cabinet.

Barker: Eventually, you have to put some detergent in. (laughs) It's just, it's a whole thing.

Hill: It's not worth it. You know what I'd rather do? Take a sleeve of yogurt, one of those yogurt tubes, and just jam that in my mouth, swallow it whole, and then throw it away, because that doesn't involve dishes.

Barker: Maybe just take the box of cereal out and eat it with your hands. If the whole bowl and spoon thing is too much for you, Millennials, skip it. Just pour it straight into your mouth.

Hill: Do you think it's possible that cereal consumption, which is declining, not at some precipitous rate, but it is declining, and cereal sales, not just General Mills, but you look across the industry, they are declining, do you think it might possibly have a little bit more to do with people trying to reduce carbs in their diet?

Barker: I think it's got to do with a lot of transitions in how people eat and eat, especially, prepared foods, and foods which are not necessarily designed for your health, like, I don't know, Trix, I think, is... (laughs) despite--

Hill: Is Trix not healthy? Isn't Cap'n Crunch healthy?

Barker: Well, it's got seven or 11 essential vitamins and minerals, right?

Hill: It's part of your complete breakfast.

Barker: It is part of your complete breakfast. And, so, not everybody buys that, apparently. So, the great sugary cereals of our youth are not growing their sales. But Cheerios is very stable. I mean, you raised your kids on Cheerios, right?

Hill: Oh, yeah.

Barker: You have to. It's actually kind of the law in this country.

Hill: It kind of is the law. It's certainly an easy snack when kids are little and you're learning -- you can't just throw a bunch of corn flakes on their plate--

Barker: Frosted Flakes at them.

Hill: Or Cap'n Crunch, because that won't go well, particularly if they're just starting to get their teeth--

Barker: So, they've got all these things that are still very relevant, but they're not really growing entirety.

Hill: Oh, wow! You're back to General Mills? I thought we'd just completely gone off topic and focused on cereal. (laughs) 

Barker: I occasionally go back on topic. (laughs) We can talk about cereal as long as you want. But, the point is, these things are stable but in slight decline. They'll introduce some new extensions to the brands, more different flavors of Cheerios and pick up a brand every once in a while. But the total package ends up being a stable but not very fast-growing thing.