General Mills reported flat organic growth last quarter, and its earnings declined by more than 10%.
Its free cash flow remains strong and exceeds what it has paid out in dividends.
A dividend cut may not be imminent, but investors shouldn't feel terribly comfortable with the payout.
Food companies have been struggling this year. Between inflation and the growing popularity of GLP-1 drugs, which are curbing appetites, companies such as Conagra and Campbell's haven't been doing particularly well. Both of those companies cut their dividend payments this year.
Top cereal maker General Mills(NYSE:GIS), however, has kept its dividend intact, at least for now. At 7.2%, it's one of the highest-yielding stocks in the S&P 500. But is it really safe?
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General Mills last reported earnings on Sept. 23, and that's a good place to start when looking at the safety of its payout, to get an idea of how it's been doing of late. For the quarter, which ended on Aug. 30, the company's net sales were down 3%, but that was due to its U.S. yogurt divestiture, and its organic sales were flat. While that's not awful, it's not terribly exciting, either.
A year ago, the food company got a boost from a gain on divestitures, but even after adjusting for that, its per-share profit this past quarter was $0.75, down from $0.86 in the prior-year period. At its current quarterly dividend rate of $0.61, its payout ratio is around 81%, which is a bit high but perhaps not unsustainable.
Cash flow can sometimes be a better indicator of a company's ability to pay dividends, as non-cash items such as depreciation and amortization can weigh down the bottom line. In the trailing 12 months, General Mills' free cash flow totaled $1.6 billion, which is higher than the $1.3 billion the business has paid in dividends over that period. It suggests there is a buffer there, but, as with earnings, it isn't a huge one.
For now, I don't see a glaring reason why General Mills may cut its dividend in the near future. It's facing some challenges, but with the stock already down 45% over the past five years, news of a dividend cut may only cause its valuation to sink even further.
At the same time, however, investors shouldn't feel too comfortable with the business, as anytime a company is experiencing a decline in earnings and it's struggling to generate growth, there are valid reasons to be concerned about its dividend, as it may only be a matter of time before things get to a point where it needs to be reduced.
Although General Mills' dividend may look attractive for its high yield, a safer option may be to choose other dividend stocks with stronger financials.
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David Jagielski, CPA has no position in any of the stocks mentioned. The Motley Fool recommends Campbell's. The Motley Fool has a disclosure policy.