General Mills (GIS) will report third-quarter fiscal 2016 earnings before the opening bell Wednesday. Investors who are looking for a solid growth candidate that also pays an above-average dividend yield can do well with General Mills.
Known for its Cheerios cereal, Yoplait yogurt and various ready-to-eat foods, the Minnesota-based company has seen its stock climb some 6% year-to-date and 18% over the past 12 months, against a year-to-date decline of 1% for the S&P 500 (SPX) . Thanks to various cost-cutting initiatives, combined with strategic acquisitions to shore up its product portfolio, General Mills looks well-positioned to deliver earnings growth in the years ahead and sustain its current outperformance.
So while General Mills stock -- at a forward P/E of 21 -- doesn't scream bargain today compared with a 17 P/E for the S&P 500 index, General Mills also pays a 46-cent quarterly dividend that yields 3.04% annually, which is one full percentage point higher than the S&P 500. The company, thanks to its strong cash flow of almost $3 billion annually, has raised its dividend almost 60% in the past four years.
In my view, the safety General Mills' dividend creates, combined with the year-to-date returns the stock has already provided, trumps the implied lack of value of its P/E. And after Wednesday's results, these shares likely won't get cheaper.
For the quarter that ended in February, the company is expected to earn 62 cents per share on revenue of $4.09 billion, compared to the year-ago quarter when earnings were 70 cents on revenue of $4.35 billion. For the full fiscal year ending in May, earnings are projected to be a flat $2.86 per share, while revenue of $16.65 billion would mark a year-over-year decline of 5.6%.
In its second fiscal quarter, General Mills saw its sales decline 2% year-over-year, owing to the strong U.S. dollar that devalued its sales in overseas markets. Its international sales declined more than 12.4%. But the company still grew both its gross margin and operating profit rate by respective increases of 60 basis points and 100 basis points.
General Mills' efficiency improvements, including its cost-cutting efforts, have begun to bear fruit. Although its revenue may suffer, the company is finding ways to make money by offsetting weak revenue with strategic reductions. Given these factors, General Mills stock should be in your portfolio, especially when combined with its strong dividend.