​Cereal Killers with Great Dividends

Cecil is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Sometimes, I feel there are certain industries that are better positioned than others for steady growth. Essential commodities are obviously things that people would buy regardless of adverse conditions--or at least they’ll be among the last few things to be sacrificed. This is the way I feel about companies that are involved in the sales or distribution of food.

General Mills (NYSE: GIS) is one of those companies. It’s a worldwide processed and packaged foods company that clocks in revenue of around $16.6 billion. The company has a diverse portfolio that includes iconic brands such Cheerios, Betty Crocker, and Haagen-Dazs ice cream. The company has three reporting segments – US retail, International, and Bakeries and Foodservices.

General Mills reported strong financial results for Q1 2013. It posted net sales of $4.04 billion, up 5% for the quarter, but missed the Street's estimate of $4.08 billion. Increase in net sales was thanks to volume growth of 9%. Unfortunately, foreign currency exposure took away 2% of net sales.

Emerging markets show a lot of potential growth for the company. Sales growth in countries like India, Brazil, and China were in double digits. The US Retail segment traditionally is the biggest contributor to revenue, but that trend is slowly changing. The US retail division contracted by 1% in Q1, whereas the company’s International segment posted strong growth of 27%. US retail contributed to 70% of revenue in the year ended 2010, which fell to 61.5% in Q1 2013, while the same numbers for the International segment were 18% and 27%, respectively. The Bakeries and Foodservices division has been fairly consistent in terms of contributing revenue, staying at around 12%.

The company has a long-term growth model, which includes net sales growth in the low single digits, operating profit growth in mid-single digits, and diluted EPS growth in high single digits. In order to achieve growth in the long term, the company will be focusing on the following five areas: innovation, brand building, leading customer growth, margin expansion, and international expansion. 

The main problem that General Mills and its competitors such as Kellogg (NYSE: K) and Mondelez International (NASDAQ: MDLZ) are facing is high input costs. These companies are looking for alternatives to passing on the cost to consumers. And there’s a light at the end of the tunnel for these companies. Cost input inflation is expected to decrease to 2%- 3% in the fiscal year 2013, as compared to 10% in fiscal year 2012.

If you look at Kellogg, the company’s recent acquisition of P&G’s snack food division was a good acquisition to shake things up in the sluggish cereal market. The snack food division included the iconic potato snack, Pringles. Mondelez International, which was recently spun off from Kraft, also has tremendous scope for growth – considering it is a company with its eyes specifically on emerging markets.

As I mentioned earlier, these countries show huge potential as middle class consumers begin to make some of these brands household names. With regards to dividends, Mondelez may not pay out as much as Kraft, because of where they are in the business cycle, but they show a good scope for growth.

General Mills is a company that is known to share its profits with shareholders. It offers a dividend yield of 3.3% and an annualized dividend rate of $1.32 per share. Dividends have been growing steadily, and the company is targeting dividend growth of 2-3% in the long term. The 22% return on equity offered by the company is higher than that of ConAgra Foods. Also, GIS offers an attractive gross profit margin of 40%. The P/E for GIS is 15.57, which is better than Kellogg's 16.10. Considering the numbers, GIS seems to be an excellent dividend stock.

ceciljohn2002 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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