Is General Mills a buy?
To determine whether General Mills, Inc. (NYSE:GIS) stock is reasonably priced I’ll use the dividend discount model to determine what 10-year growth rate is necessary to justify the current market price of around $47.70 per share. Since we know that 2013 will see an increase of about 13.5% in the annual payout, this can be included in the calculation. The results using my dividend valuation tool are shown below.
General Mills needs a ten-year dividend growth rate of about 9.355% for the stock to be fairly valued, slightly below the historical 10-year growth rate. This suggests that the stock is fairly valued, not a screaming bargain but a solid dividend stock nonetheless.
The bottom line
I expect General Mills, Inc. (NYSE:GIS) to be able to roughly maintain its historical dividend growth rate into the future, and under this assumption the stock looks fairly valued – you get what you pay for. Both Kellogg and Campbell Soup Company (NYSE:CPB) have both lower yields and lower growth rates, making those stocks significantly overvalued with respect to the dividend. Of the three, General Mills, Inc. (NYSE:GIS) is the clear choice, although after a run-up in the stock price over the last two months waiting for a pullback would make the dividend even more attractive. Regardless, General Mills is a good choice for any dividend-focused portfolio.
The article A Shiny Dividend in Your Cereal Box originally appeared on Fool.com and is written by Timothy Green.
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