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Should Income Investors Look At General Mills, Inc. (NYSE:GIS) Before Its Ex-Dividend?

Simply Wall St

Readers hoping to buy General Mills, Inc. (NYSE:GIS) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. If you purchase the stock on or after the 9th of October, you won't be eligible to receive this dividend, when it is paid on the 1st of November.

General Mills's upcoming dividend is US$0.5 a share, following on from the last 12 months, when the company distributed a total of US$2.0 per share to shareholders. Looking at the last 12 months of distributions, General Mills has a trailing yield of approximately 3.7% on its current stock price of $53.37. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

View our latest analysis for General Mills

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. General Mills is paying out an acceptable 63% of its profit, a common payout level among most companies. A useful secondary check can be to evaluate whether General Mills generated enough free cash flow to afford its dividend. It paid out more than half (52%) of its free cash flow in the past year, which is within an average range for most companies.

It's positive to see that General Mills's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

NYSE:GIS Historical Dividend Yield, October 4th 2019

Have Earnings And Dividends Been Growing?

Stocks with flat earnings can still be attractive dividend payers, but it is important to be more conservative with your approach and demand a greater margin for safety when it comes to dividend sustainability. If earnings fall far enough, the company could be forced to cut its dividend. With that in mind, we're not enthused to see that General Mills's earnings per share have remained effectively flat over the past five years. Better than seeing them fall off a cliff, for sure, but the best dividend stocks grow their earnings meaningfully over the long run. Earnings per share growth has been slim, and the company is already paying out a majority of its earnings. While there is some room to both increase the payout ratio and reinvest in the business, generally the higher a payout ratio goes, the lower a company's prospects for future growth.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. General Mills has delivered an average of 8.6% per year annual increase in its dividend, based on the past ten years of dividend payments.

The Bottom Line

Is General Mills an attractive dividend stock, or better left on the shelf? General Mills has struggled to grow its earnings per share, and while the company is paying out a majority of its earnings and cash flow in the form of dividends, the dividend payments don't appear unsustainable. Overall, it's hard to get excited about General Mills from a dividend perspective.

Curious what other investors think of General Mills? See what analysts are forecasting, with this visualisation of its historical and future estimated earnings and cash flow.

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.