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General Mills: Undervalued Blue-Chip Dividend Yielding 4.3 Percent

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By Wednesday, 14 November 2018 11:46 AM Current | Bio | Archive

Volatility has reared its ugly head again. The most commonly utilized gauge of volatility in the stock market, the CBOE Volatility Index (VIX), otherwise known as the “fear index”. The VIX measures the expectations of forward-looking volatility in the stock market, and has increased roughly 80% year-to-date.

The rise of the VIX throughout 2018 signals continued volatility in the weeks ahead. In times of elevated volatility, investors can take shelter in steady dividend stocks such as General Mills (GIS). As a giant food company, General Mills enjoys consistent profitability and rewards shareholders with a high dividend of 4.3%.

With a 100+ year dividend history, annual dividend increases for over 10 years in a row, and a 4.3% yield, General Mills is a blue-chip dividend stock that can offer investors shelter from the storms.

Everyone Has To Eat

In the past five years, General Mills stock has had a beta value of 0.60 on average. This means that for every 1% move in the S&P 500 in either direction, General Mills stock moved 0.6% in the same direction. A beta value less than 1.0 indicates relatively low volatility, compared with the broader market index. General Mills stock is not very volatile, a direct result of having a fairly boring business model. But for risk-averse investors, General Mills’ consistency is a welcome reprieve from the broader market volatility.

General Mills is a large food company. It has a large portfolio of cereal brands, along with a diversified group of other popular brands including Gold Medal, Betty Crocker, Pillsbury, Yoplait, Häagen-Dazs, Nature Valley, and others. General Mills’ diversified brand portfolio has not performed up to expectations in recent periods, due to sluggish sales of cereal and yogurt. The company’s sales and adjusted earnings were both flat in fiscal 2018.

Still, General Mills benefits from a fundamental truth. Everyone has to eat, even during recessions, which provides the company with a certain degree of product demand every year. Shifting consumer trends have caught General Mills off guard in the past few years, but the company has moved aggressively to catch up in critical areas.

In response to its lack of growth in recent years, General Mills has engineered a turnaround by investing in growth, primarily through acquisitions. For example, the 2014 acquisition of Annie’s for over $800 million significantly boosted the company’s presence in natural and organic food, an emerging growth category. General Mills expects its natural and organics portfolio to reach $1 billion in sales next year.

In addition, General Mills made a huge play in the pet food market by acquiring Blue Buffalo for $8 billion. Pet food is a $30 billion market and is growing at a high rate. According to General Mills, the pet food market has grown by 5% a year in the past decade. The acquisition of Blue Buffalo gave General Mills a leading position in the premium pet food segment, which offers pricing power. Last quarter, pet food sales grew 14% for General Mills.

Feeding Investors Hungry For Income

General Mills currently pays a dividend of $1.96 per share, good for a 4.3% yield based on the current share price. General Mills is a high yield stock, considering stocks in the S&P 500 Index yield less than 2% on average right now. High-yield stocks like General Mills are especially valuable for income investors in times of low interest rates, when high yields are hard to find.

General Mills has a secure dividend payout. Consensus estimates call for the company to earn $3.07 per share in the upcoming fiscal year. This level of earnings would easily cover the company’s dividend payment, with a payout ratio of 64%.

As the company’s turnaround gains momentum, there could be room for future dividend increases as revenue and earnings return to growth. In the meantime, General Mills stock is an undervalued blue chip with a safe and attractive 4.3% dividend yield.

Ben Reynolds is CEO of Sure Dividend. Sure Dividend helps individual investors build high quality dividend growth stock portfolios for the long run.

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As the company’s turnaround gains momentum, there could be room for future dividend increases as revenue and earnings return to growth. In the meantime, General Mills stock is an undervalued blue chip with a safe and attractive 4.3% dividend yield.
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Wednesday, 14 November 2018 11:46 AM
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