General Mills (GIS) VS Kellogg Company (K): One Stock Is Clearly Winning

Evenly Matched But One Is Clearly Winning

In my quest for the very best consumer staples investments for dividend-growth, I’ve matched two of the market’s most iconic brands. In the one corner is General Mills (NYSE: GIS)  and the other Kellogg Company (NYSE: K). Both are well-known as purveyors of fine breakfast cereals, both are making major headway into other packaged foods verticals, and both pay a healthy dividend.

When looking at the fundamentals the companies are evenly matched but there is still a question to be answered. Which is the better buy today? To answer this question I will be looking at four factors; the dividend, the balance sheet, the outlook, and the technical picture.

The Dividend: Yield And Growth Versus Safety

A quick glance at the dividend stats for these companies is a little misleading. Kellogg is listed as a dividend-grower with 15 consecutive years of increases while General Mills has 0. A deeper look will show that both companies have a long history of increases it’s just that General Mills has not raised the distribution since 2017. Regarding the yield, General Mills pays about 3.15% compared to Kellogg’s 3.44%.

A metric used by many dividend-growth investors that has bearing on today’s decision is the five-year compound annual growth rate. The 5-year CAGR is a measure of the long-term rate of increase in a dividend and telling in this case. While Kellogg has a more-current history of increases the five-year CAGR is only 3.5% which doesn’t amount to much even when compounded. Looking at General Mills, even though there is no current-history of increases the last was large enough the CAGR is still running near 4.0% and 50 basis points above Kellogg.

The last dividend-metric I will leave you with is the payout ratio. The payout ratio is better with General Mills, 55% compared to 60%, suggesting a safer payment and better outlook for future increases. In terms of future earnings, the ratio with General Mills creeps lower while that at Kellogg’s creeps higher but there is a mitigating factor.

Mixed Outlook For Growth But The Analysts Are Too Conservative

Both companies have a mixed outlook for growth and an outlook that is as comparable to the other as the dividend. On the one hand, General Mills is looking at a decline in EPS and revenue in the range of 2.5% for the current calendar year. On the other, Kellogg is looking at an EPS decline of 3.30% and revenue decline of 1.75%. The caveat for investors is the fiscal years for these companies are offset by two quarters so not exactly comparable.

Looking at the two-year comparison, the rate of growth over the period spanning the pandemic and the expected rebound, the companies are still evenly matched but one stands out. General Mills, while not expected to produce stunning growth, will see a slightly-positive two-year EPS growth rate while Kellogg will not. Kellogg isn’t expected to surpass its pre-COVID revenues until the fiscal 2022 period.

Now, regarding the analysts, the analysts are too conservative with these and just about every other business on the market today. Results from a number of company’s including other staple names suggest that General Mills and Kellogg will both surpass full-year revenue. Simply looking at the YTD results, consumer trends, and the consensus for calendar Q2 2020, both will easily meet their calendar 2020 targets.

The Balance Sheets, This May Tip The Balance

Both companies have sound balance sheets but there are some metrics that tip the balance in favor of General Mills once again. While Kellog has plenty of cash, well-managed debt, and ample coverage it has significantly more debt than General Mills. What this means to me is that Kellog, while having a better history of increase, is actually in the worst position regarding future increases and dividend stability.

A look at the chart helps confirms this outlook. Since the beginning of the year shares of Kellog have only traded in-line with the broad market while General Mills has surged. Because both are trading about 17X earnings there is little reason to expect Kellog to catch up, unless of course, the analysts are more-wrong about Kellogg than they are about General Mills.

The bottom line? Kellogg may be set up for a big move, it may pay a better yield, but it doesn’t have the better outlook for revenue or earnings, or for distribution increases, so in my view, General Mills is the better choice. PS, when General Mills moves up to set a new high above $64 it will open the door to $72. The $72 level is, ironically, the all-time high set just before the last dividend increase in 2017.