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3 Food Stocks With Better Dividends Than Whole Foods Market, Inc.

By Jeremy Bowman - Mar 23, 2016 at 10:21AM

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Income investors are better off with these three plays than the leading organic grocer.

Whole Foods store. Image source: Motley Fool.

Whole Foods Market (WFM) is a rare breed in the investing world -- a growth stock that offers a dividend. Though the stock has come under considerable pressure in the last year, the company has committed to returning capital to shareholders. It raised its quarterly dividend 4% to $0.135 last November, its fifth consecutive annual increase, and announced a $1 billion share repurchase program, which would reduce shares outstanding by nearly 10% if enacted at today's stock price.

Whole Foods stock now pays a 1.6% dividend yield, and with a payout ratio of just 34%, the company could afford to boost that payout. However, profit has been falling in recent quarters as organic growth has slowed due to competitive challenges. As the company maps out a turnaround strategy and invests in a new chain of budget-priced stores and lower prices, it's unlikely to raise its dividend substantially. During the recession, the company even suspended its dividend for three years as profits declined substantially, and continued weakness could threaten it again. For investors looking for a solid dividend stock in the food sector, here are three better options.

1. General Mills (GIS -0.28%)
A legacy food-maker like General Mills may seem like an odd choice, but the owner of dozens of brands including Cheerios has navigated the industrywide transition to organic and natural foods better than most of its rivals. The stock trades near an all-time high, and the company's portfolio of healthy brands, such as Nature Valley granola bars, Yoplait yogurt, and Cascadian Farm organic frozen fruit and vegetables, puts it in a better position than rivals, whose portfolios skew more toward junk-food brands.

In recent years, General Mills has acquired Annie's, the popular maker of organic shells and cheese and other foods that line the shelves of Whole Foods, and earlier this year it purchased EPIC, a maker of premium meat snacks. The company also signaled its commitment to transparency by promising this week to label foods with GMOs. 

General Mills' dividend has also been a solid bet. It currently offers a 3% dividend yield with a 64% payout ratio, and has a 12-year streak of dividend hikes. Growth in recent years has been flat as the company restructures and cuts costs to better position itself for the future, but signs point to sustainable profit growth starting next fiscal year.

2. Campbell Soup Company (CPB -0.48%)
Another traditional food-maker that's shown the ability to adapt to a changing market is Campbell Soup. The company last year acquired Garden Fresh Gourmet, which makes the No. 1 branded refrigerated salsa in the U.S, as well as hummus, dips, and chips. Campbell counts Prego, V8, and Pepperidge Farm among its brands. 

While sales have been flat recently, the company has cut costs and improved productivity and efficiency, sending earnings per share up 21% through the first six months of the fiscal year. Its Campbell Fresh segment operating income jumped 77% in that period, indicating room for growth.

Campbell's stock pays a dividend yield of 1.94% with a payout ratio of 42%. The company has not raised its payout since 2013, but I'd expect the hikes to return as profits grow and the payout ratio remains modest.  Like General Mills, Campbell has already embraced GMO labeling, and its CEO, Denise Morrison, seems to be ahead of the curve in embracing changing food consumption patterns.

3. PepsiCo (PEP -0.34%)
Finally, PepsiCo has been one of the most dependable food stocks in recent years. Shares are up 60% in the past five years, and the dividend yield is solid at 2.8%. Pepsi is also a Dividend Aristocrat, having grown its quarterly payout for 43 years, and has a reasonable payout ratio of 60%, giving it room to continue to lift its dividend.

Pepsi has faced headwinds recently as Americans turn away from soda, and the strong dollar has weighed on foreign earnings, but the company's broad portfolio of profitable, global brands has provided it with a steady growth engine. In addition to its namesake soda and other beverage brands, the company has a diversified footprint in food with Quaker Foods, Frito-Lay, and others, and includes healthy brands like Naked juices and Sabra hummus.

The company has consistently beaten analyst estimates, its currency-neutral adjusted earnings per share grew 10% last year, and it expects it to improve another 8%, fueled by 4% organic growth and share buybacks. Pepsi last increased its dividend 7.3%, and I'd expect the streak to continue for many more years.

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Stocks Mentioned

Pepsico, Inc. Stock Quote
Pepsico, Inc.
$170.12 (-0.34%) $0.58
Campbell Soup Company Stock Quote
Campbell Soup Company
$48.13 (-0.48%) $0.23
General Mills, Inc. Stock Quote
General Mills, Inc.
$75.47 (-0.28%) $0.21
Whole Foods Market, Inc. Stock Quote
Whole Foods Market, Inc.

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