Consumers continue to shift to healthier foods, and these two leading food makers are finding ways to adapt.
Campbell Soup and General Mills now make more products with low sugar and salt, and they have cut their costs. While those moves will support future dividend increases for both, we prefer Campbell Soup for new buying.
GENERAL MILLS INC. $58 (New York symbol GIS; Income-Growth Dividend Payer Portfolio, Consumer sector; Shares o/s: 576.1 million; Market cap: $33.4 billion; Dividend yield: 3.3%; Dividend Sustainability Rating: Highest; www.generalmills.com) is one of the world’s largest food makers. Its top brands include Cheerios (cereal), Pillsbury (baking dough), Betty Crocker (cake mixes). Old El Paso (tacos), Progresso (soups and salads) and Yoplait (yogurt).
In its fiscal 2017 third quarter, ended February 26, 2017, revenue fell 5.2%, to $3.8 billion from $4.0 billion a year earlier. The decline was mainly due to lower sales for its U.S. yogurt and packaged-meals businesses.
Earnings fell 1.1%, to $357.8 million from $361.7 million. Due to fewer shares outstanding, earnings per share rose 3.4%, $0.61 from $0.59.
The company has also reorganized its operations to create four new divisions: North America retail, Europe & Australia retail, Asia & Latin America retail, and convenience stores & foodservice. As part of this change, General Mills will eliminate up to 600 jobs, or about 2% of its global workforce.
If you exclude costs related to that restructuring and other unusual items, the company’s earnings in the quarter rose 10.8%, to $0.72 a share from $0.65.
The reorganization will help General Mills boost its operating profit margin from 16.9% in the latest quarter to 20% by the end of fiscal 2018. (Operating profit margin is operating profit before unusual items, divided by sales. The higher the better.)
The company has paid a dividend since 1898, and its improving profitability will let it keep raising that payment. General Mills has increased the yearly dividend rate eight times since 2010. The current annual dividend payment of $1.92 a share yields 3.1%.
The company will probably earn $3.05 a share in fiscal 2017, and the stock trades at 19.0 times that forecast.
General Mills is a hold.
CAMPBELL SOUP CO. $57 (New York symbol CPB; Conservative-Growth Payer Portfolio, Consumer sector; Shares outstanding: 304.4 million; Market cap: $17.4 billion; Dividend yield: 2.5%; Dividend Sustainability Rating: Above Average; www.campbellsoupcompany.com) is the world’s largest maker of canned soups. Other products include Prego canned pasta and sauces, Pepperidge Farm cookies, V8 vegetable juices and Bolthouse Farms fresh carrots.
The company earned $281 million in its fiscal 2017 second quarter, ended January 29, 2017. That’s up 3.7% from $271 million a year earlier. Per-share earnings gained 4.6%, to $0.91 from $0.87, on fewer shares outstanding.
The higher earnings are due to a lower tax rate and a successful cost-cutting plan. Campbell expects restructuring to remove $300 million from its annual expenses for fiscal 2017. The yearly savings should rise to $450 million by the end of 2020.
Sales in the quarter declined 1.4%, to $2.17 billion from $2.20 billion. That’s partly because bad weather reduced the company’s supply of fresh carrots. Lower sales of V8 juices also hurt revenue.
Campbell has announced a new plan to repurchase up to $1.5 billion of its shares. There is no time limit.
With the October 2016 payment, the company raised its quarterly dividend by 12.2%, to $0.35 a share from $0.312. The new annual rate of $1.40 yields 2.5%. Campbell has paid dividends continuously since it began trading in 1954.
The company should earn $3.07 a share for fiscal 2017, and the stock trades at 18.6 times the forecast. That’s a high p/e, but still reasonable in light of Campbell’s potential to expand overseas (foreign sales supply just 20% of the total).
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