(Published March 1 by Bob Ciura)
General Mills (GIS, Financial) and Kellogg Co. (K, Financial) dominate the breakfast aisle and have done so for decades.
Along the way, they have amassed huge product portfolios and sell their products around the world.
Both stocks maintain impressive histories of rewarding shareholders with steady dividends. General Mills has paid uninterrupted dividends for 117 years while Kellogg just paid its 369th dividend payment since 1925.
Both General Mills and Kellogg are Dividend Achievers, a group of 272 stocks with 10-plus years of consecutive dividend increases.
You can see the full Dividend Achievers List here.
They have similar business models with Kellogg taking a lead in growth. But General Mills has an ace up its sleeve – a higher dividend payout.
Business overview
Winner: Kellogg
General Mills and Kellogg are both diversified food and beverage companies and compete directly with one another in many areas.
But they have subtle differences in their brand portfolios, which have had a meaningful impact on their respective growth.
General Mills’ biggest brands include Cheerios, Yoplait, Nature Valley, Pillsbury, Betty Crocker and Progresso.
Source: Company website
Kellogg is also a major player in cereal; like General Mills, it has expanded into other products. Kellogg possesses a diversified portfolio with leadership positions across its core categories.
Source: 2017 CAGNY Presentation, page 12
General Mills and Kellogg both reported sales declines in 2016. They have struggled to grow sales of their legacy cereal brands as consumers are taking a harsher view of sugar content in breakfast foods.
However, Kellogg has been shielded from this slightly more than General Mills. Kellogg’s net sales declined 4% in 2016Â compared with a 6% decline for General Mills.
Excluding foreign exchange, Kellogg’s sales increased 4% last year while General Mills’ declined 2% in fiscal 2016.
One reason for this is that Kellogg has the Kashi brand, and it has been able to retain and grow market share in cereal over the past few years.
And Kellogg’s snacks businesses are performing well. In addition to its core cereal brands, Kellogg has a large snacks business with brands like Pringles, Keebler, Famous Amos and Cheez-It.
Source: 2017 CAGNY Presentation, page 35
A greater portion of General Mills’ portfolio is tilted toward shelf-stable, frozen and canned foods. These categories have stagnated in the U.S. in recent years, and the company has suffered as a result.
For example, sales of General Mills’ baking products, yogurt and meals declined 7%, 17% and 17% last quarter.
In response, General Mills and Kellogg have launched programs to refocus themselves on growth in new categories.
Kellogg’s snacks brands should provide it with stronger growth moving forward.
Growth prospects
Winner: Kellogg
General Mills and Kellogg have similar growth priorities moving forward. They are each refocusing their portfolios to more actively respond to changing consumer preferences.
Led by Annie’s, General Mills has a large portfolio of natural and organic products.
Source: Barclays Back-to-School Conference, page 36
Kellogg also has its eyes on natural foods – it aims for $1 billion in annual revenue from its natural-products business by 2020. General Mills expects to reach the $1 billion mark in 2019.
Kellogg’s natural portfolio is built upon Kashi and the MorningStar Farms label.
When it comes to its core cereal businesses, Kellogg has been more successful in restoring growth.
Source: 2017 CAGNY Presentation, page 15
These include its core six cereal brands, Eggo and Pop-Tarts. Collectively these brands represent 40% of Kellogg’s sales in North America.
The efforts have worked. Kellogg has claimed market share in cereal products. Kellogg has increased share of its core six cereal brands from 22.3% to 22.9% over the past three years.
Plus Kellogg’s snacks business gives it a key advantage over General Mills.
For example, Cheez-It has racked up 20 consecutive years of sales growth in the U.S., including 8.6% growth last year.
Source: 2017 CAGNY Presentation, page 21
From 2013-2016, sales of Pringles and Rice Krispies Treats have increased 4% and 9% per year.
General Mills expects currency-neutral sales to decline another 3% to 4% in fiscal 2017. Kellogg expects a milder 2% decline in comparable sales.
Dividends
Winner: General Mills
General Mills gets the nod when it comes to dividends. Kellogg has a 2.8% dividend yield. This is a solid yield and exceeds the 2% average dividend yield of the Standard & Poor's 500 Index.
However, General Mills has a higher dividend yield, of 3.2%.
This means, for a $10,000 investment in each stock, Kellogg stock provides $280 in dividend income. General Mills stock would generate $320 in annual dividends at the current rate, approximately 14% more than Kellogg.
General Mills presents a higher dividend yield in part because of its stronger dividend growth rate in recent years.
General Mills has increased its dividend twice in the past year. Its quarterly dividend is up 9.1% in that time. This is a strong dividend growth rate over the course of a year.
For its part, Kellogg’s quarterly dividend payout is up a more modest 4% in the past year. This is about on par with Kellogg’s average dividend growth rate over the past five years.
The difference in their dividends is that Kellogg is retaining more cash flow to invest in growth initaitives.
Based on their 2016 adjusted earnings per share, General Mills and Kellogg have payout ratios of 66% and 56%.
General Mills is carrying a payout ratio of 10 percentage points higher than Kellogg. Even so, it is not problematic for General Mills to distribute two-thirds of its earnings. There is still plenty of cash flow left over to invest in the business.
It remains possible that Kellogg could be willing to raise its payout ratio moving forward. But for now, General Mills is more attractive for dividends.
Final thoughts
Both General Mills and Kellogg are working to reshape their brand portfolios in response to changing consumer demands.
Thanks to its snacks businesses, Kellogg performed better than General Mills in 2016, and its outperformance is expected to continue in 2017.
The one area in which General Mills has a significant advantage is that it is distributing a higher dividend yield to investors.
As a result, while Kellogg appears to be the better stock for growth, General Mills has the edge for dividends. Both stocks have better-than-average ranks using The 8 Rules of Dividend Investing thanks to their stability and shareholder-friendly managements.
Disclosure: I am not long any of the stocks mentioned in this article.
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