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In this screen, we turned our attention to comparatively low-risk stocks that have good records for dividend growth. In addition, our selection criteria focused on those issues that our analysts project will continue providing investors with dividends that are likely to increase at above-average rates.

We began our search with stocks whose dividends have advanced at a compounded annual rate of at least 7% over the last five years. Similarly, we next narrowed the list to equities with projected annual dividend growth rates of at least 7% over the next three to five years. We also set a minimum estimated yield for the year ahead of 3.0%.

We then restricted our search to stocks with above-average ranks for both Safety (1 or 2) and Financial Strength (B++ or better), two of Value Line’s many proprietary ranks. Companies whose shares earn high marks for these metrics generally will fare better in volatile markets than the typical stock under our review. Lastly, to reduce the risk of underperformance, we limited the selection to issues ranked 3 (Average), or better, for Timeliness (i.e., relative price performance over the next six to 12 months), another proprietary Value Line measure.

The set of stocks that made the final cut are not only judged to be safer than most, but also possess proven and prospective dividend growth rates that are likely to exceed the average rate of inflation under the time periods chosen for this review. Consequently, the list will likely appeal to conservative investors in search of current income. We note that this group is comprised of a fairly wide range of companies, not just regulated utilities and financial institutions as per past dividend-focused screens. Indeed, other industries, such as food processing, had a strong showing. Not surprisingly, our list is dominated by large-cap industry leaders. Of the 17 names that made the list (see below) we have chosen to highlight one, General Mills (GIS)

General Mills

General Mills has the first or second largest share of United States’ retail markets in 11 food categories. The six largest, in descending order of size, are ready-to-eat cereals (Cheerios, Fiber One); yogurt and ice cream (Yoplait, Haagen-Dazs); frozen vegetables (Green Giant); Mexican products (Old El Paso); grain snacks (Nature Valley); soup (Progresso). International sales accounted for 25% of fiscal 2012’s (ended May 29th) $16.6 billion total, while 12% was derived from domestic bakeries and food service customers. In fiscal 2012, Wal-Mart Stores (WMT - Free Wal-Mart Stock Report) accounted for 22 percent of its consolidated net sales and 30 percent of its net sales in the U.S. Retail segment.

The company’s second quarter earnings per share beat expectations by a significant margin. Around two thirds of the 6% year-over-year rise in revenues was due to acquisitions made over the past few years. Further, the U.S. Retail division (63% of sales) had positive volume growth for the first time in seven quarters. The near-term performance of this division will likely have a meaningful impact on the stock price.

Looking further into this business, we think the yogurt subdivision will need to show signs of growth for investor sentiment to improve. That unit had been losing market share for quite some time as its offerings in the Greek yogurt category were lacking compared to the competition. In the November quarter, however, the yogurt business stabilized. Over the next two periods, it will be facing relatively easy comparisons. Further, General Mills will be rolling out a wider assortment of Greek yogurts to capitalize on that variety's rapidly increasing popularity. Lastly, price points will be lowered to better compete with the competition.

We think if the yogurt business does improve, the company will easily be able to surpass its guidance of mid single-digit growth for the year. That said, GIS is still contending with a challenging consumer demand environment, and recently increased its cost inflation target to 3% from 2%-3%.

General Mills has increased its dividend at an average annual rate of 10.5% over the past five years, and Value Line analyst William G. Ferguson thinks that this rate will only slow marginally, to 8.5% in the coming three to five year period. At present, GIS’ stock has a respectable yield of 3.2%, 100 basis points higher than the average stock in our universe.

Due to the uncertainties surrounding competition and the lagging yogurt business, shares of General Mills are currently trading at a price-to-earnings multiple that reflects a greater than 10% discount to peer consumer food stocks. We think this is an attractive differential that has a good probability of being closed over the next year. We find these shares suitable for conservative investors.

     

Company

Ticker

Gen'l Mills

GIS

Mattel, Inc.

MAT

Clorox Co.

CLX

Hanover Insurance

THG

Hasbro, Inc.

HAS

Lockheed Martin

LMT

McDonald's Corp.

MCD

Microsoft Corp.

MSFT

Molex Inc.

MOLX

NextEra Energy

NEE

Northeast Utilities

NU

Northrop Grumman

NOC

Procter & Gamble

PG

Raytheon Co.

RTN

Sempra Energy

SRE

South Jersey Inds.

SJI

Wisconsin Energy

WEC

     

 

At the time of this article's writing, the author did not have positions in any of the companies mentioned.