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General Mills: A Tasty Dividend Treat for Now

When it comes to ruling the world’s breakfast tables, General Mills (GIS ) is the cereal king. Over its 150-year history, GIS has been one of the leaders of America’s, and now the world’s, morning hunger fix. However, over the last few years, General Mills certainly hasn’t felt like the king. Recent missteps and a few blunders have crimped the company’s position and standing on our breakfast tables.

Those missteps have also crimped earnings, sales and overall profits.

But in spite of the misses, GIS continues to trade at a sugar high valuation. At 25 times earnings, the question for investors, especially dividend seekers, is whether or not GIS is still worth the price. According to one very successful hedge fund and private equity group, it very well could be.

Lower Cereal Sales = Higher Valuation

The problem at General Mills as of late has been all of that cereal that used to propel it forward. No one is eating it any more. American’s tastes have switched from Cheerios towards Greek yogurt, high protein bars and prepackaged breakfast sandwiches. New breakfast entrants like Starbucks (SBUX ) have continued to beef up their early morning line ups to compete with corn flakes. As a result, GIS has seen its sales slip in its largest category of revenue.

Back in 2010, General Mills managed to sell $2.35 billion worth of cereal in the U.S. Last year, that number was only $2.31 billion. $400 million is nothing to sneeze at and looks even worse when you consider that overall sales rose by 20%. Those cereal sales are still very important to the company’s bottom line.

To that end, GIS has plowed some big time bucks into developing and renewing America’s love affair with cereal. This has included adding new gluten-free options, expanding organic lines, and replacing traditional varieties of Golden Grahams, Trix and Reese’s Puffs with new, more natural versions. Good bye artificial sweeteners and dyes.

Investors seem to like the changes at GIS. Shares returned about 20% last year and are up about 5% so far in 2016. Some analysts have postulated that investors are drawn the safety of the large-cap consumer staple stock in the wake of last year’s market malaise. Either way, shares of GIS now trade for high valuations not seen since 2002. General Mills can be had for a current P/E of 25 and forward P/E of 20, higher than breakfast competitors ConAgra Foods (CAG ) and Kellogg’s (K ).

The Valuation May Be Worth It

A forward P/E of 20 is pretty high for a boring consumer staples stock. After all, this is cereal we are talking about, not the latest tech innovation. Nonetheless, investors may want to pour themselves a bowl of GIS, not for the cereal, but for its other growing brands.

General Mills happens to own big brands like Pillsbury, Yoplait yogurt, and Progresso Soups. These are the sorts of prepackaged and quick foods that are surviving and thriving in today’s market environment. There’s plenty of room for innovation and continued sales growth within these prepackaged food brands, and they are the reason why GIS saw any sort of overall sales growth over the last five years. There still could be plenty more growth ahead.

As for the cereal itself, GIS may have finally found a way to tap into America’s newly emerging “hip” and better eating consumer. The company recently reported that its cereal sales have trended up 1% in both December and January. That was driven by recent moves to cut out the “junk” and make some of its key brands gluten-free. Any incremental boosts here could help the firm beat already dismal earnings expectations.

And that’s the overall point of owning GIS, finding rising sales that translate into dividends. With a payout ratio of around 80%, General Mills is already paying out a lot of its profits as dividends, and the company continues to increase its dividend every four quarters. The last increase was 5% in the face of dwindling cereal sales. GIS has the ability to keep that going into the future based on growth at its prepackaged foods businesses. Any bump on the cereal side should help further the increases.

So Is Big G a Buy?

For investors looking for a steady diet of coupon clipping and dividend increases, the answer is yes. GIS isn’t a growth stock and the kind of appreciation it saw over the last year shouldn’t happen again. The firm does have its warts, but for steady income, General Mills makes for a great pick.

Warren Buffett’s buddies over at 3G Capital might agree. The Brazilian hedge fund, which specializes in food plays and recently did the deals for Kraft-Heinz (KHC ), Burger King (QSR ) and Wrigley (WWY), might agree. Reporting by Bloomberg shows that 3G has GIS in its sights.

While that deal/buyout is just speculation, it does show that there’s still value left in General Mills’ high valuation. Investors may just want to pour themselves a bowl and clip the firm’s 3.03% dividend.