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Should You Be Taking Profits In General Mills?


General Mills is a Dividend Contender with 13 consecutive years of dividend growth.

The stable nature of General Mills, the business, has pushed the valuation to expensive levels.

Due to the valuation of shares General Mills is at best a hold and a strong candidate to take profits from the position.

General Mills is currently trading at $71.45 giving investors a current yield of 2.6%.

For decades cereal has been the go to breakfast for Americans because it's quick, easy and relatively healthy. That makes it a staple in the pantry of millions of American households. The domestic cereal market is dominated by the two largest players General Mills, Inc. (NYSE:GIS) and Kellogg Company (NYSE:K) both owning around 30% of the ready to eat cereal market.

General Mills is much more than just a cereal company with well known brands found in kitchens everywhere. There's baking products such as Bisquick, Betty Crocker, Gold Medal Flour and Pillsbury. Haagen-Dazs ice cream in the frozen section. Larabar, Cascadian Farm and Muir Glen in the organic/natural space. Fiber One and Nature Valley for those quick snack granola bars and one of the most well known yogurt brands, Yoplait.

As a long term investor I want to stock my portfolio up with as many great companies as I can and buy shares at fair value or less. Identifying great companies is the easy part of that equation, but you make your money ensuring the value is right when you buy shares.

Let's examine some qualitative factors of General Mills and why I feel that it meets the high quality standard and then dig into whether the shares represent a value.

How about that dividend?

Before I invest in a company I want to make sure that it meets my own subjective qualitative factors. Sadly companies don't carry around a sign that says high quality so we have to look for clues within the numbers. One of the quickest ways to identify a company that is likely to be high quality is by examining its dividend record.

Companies don't just stumble into a lengthy streak of dividend payments. They must make a concerted effort to consistently grow the business and in turn the dividend.

General Mills had paid and raised dividends for 13 consecutive years giving them the title of Dividend Contender. While the recent dividend growth streak only dates back to 2003, General Mills has paid at least the same level of dividends dating back to 1899.

The following chart shows the quarterly dividend payment from General Mills since 1993.

General Mills dividend history isn't exactly one that you can count on like clockwork with flat dividends, raises every quarter, then raises once a year and so far in 2016 two raises. Due to the inconsistent nature of General Mills dividend increases I prefer to look at the percentage increases over longer periods of time to see what General Mills has really given investors over time.

The following chart shows the 1-year, 3-year, 5-year and 10-year dividend growth rates from 2002 through 2016.

Year over year dividend growth has been very inconsistent ranging from 0% all the way up to nearly 17%. Due to the variance in business trends I prefer to examine dividend growth rates covering 3-year, 5-year and 10-year periods to smooth out the year to year fluctuations.

The dividend growth rate for all 4 time periods is solidly in the high single digit to low teens per year.

A growing dividend is wonderful for investors; however, if the payout ratios get stretched too thin then the safety and ability to continue growing come into question.

As you can see the payout ratio based on earnings as well as free cash flow has been on the rise. A rising payout ratio lets investors know that not all of the past dividend growth has come from true growth of the underlying company, rather from management paying out a larger portion of net income and free cash flow to shareholders.

By analyzing the dividend history of General Mills we can make two important observations. One, that General Mills has a shareholder friendly management willing to boost payouts to investors. And two, that General Mills has the potential to be a high quality company and in turn a great investment if the valuation is right.

Historic Metrics

General Mills dividend history says a lot about the company; however, it would be imprudent to only examine the company from one perspective. As such we need to...