General Mills and Kellogg Company , the two great American cereal stocks, certainly aren't the most exciting stocks to own. However, both stocks offer decent dividends, and their portfolios of processed foods have previously withstood steep economic downturns. Therefore, let's take a closer look at both stocks to decide which is the better choice for income investors.
Source: YCharts
Two main problems caused that decline. First, demand for breakfast cereals has plunged as adults turn to healthier alternatives like yogurt, fresh fruit, and toast. For General Mills, that was bad news for core brands like Cheerios, Wheaties, and Lucky Charms. For Kellogg, that meant fewer customers were buying Fruit Loops, Corn Flakes, and Rice Krispies.
Second, food inflation caused the price of cereals and cereal products in the U.S. to rise 26% over the past ten years. Since slumping demand limits cereal makers' ability to raise prices, profitability declines. For the current year, General Mills expects its full-year operating profit in fiscal 2016 (the current year), on a constant currency basis, to decline at a "low single-digit rate". Kellogg expects its full-year operating profit for fiscal 2015 to slip between two to four percent annually.
Top line growth
Since General Mills and Kellogg have been hit hard by lower demand for breakfast cereals, both companies have diversified into other brands to offset those losses.
General Mills also owns Yoplait, Haagen-Dazs, Green Giant, Pillsbury frozen products, Betty Crocker, Annie's Homegrown organic foods, and other well-known brands. Kellogg is less diversified -- its noncereal foods mainly consist of breakfast bars, Eggo frozen waffles, Pop Tarts, and other snack foods like Cheez-It and Pringles.
As a result, General Mills' top line -- just like its bottom line -- has grown at a healthier rate than Kellogg's over the past five years.
Source: YCharts
General Mills expects annual sales in fiscal 2016, adjusted for currency impacts and excluding an extra week, to rise 1%. Kellogg expects its annual revenue growth to remain flat on a constant currency basis this fiscal year.
The winner: General Mills
With better free cash flow, top line, and bottom line growth, General Mills is clearly a better long-term dividend pick than Kellogg. General Mills' brand portfolio is also better diversified to withstand declining demand for breakfast cereals, while new health-oriented acquisitions like Annie's can help it profit from the growth of organic foods.
On top of all that, General Mills trades at 25 times earnings versus Kellogg's P/E of 51, making it the fundamentally cheaper stock. General Mills also trades at a slight discount to the industry average P/E of 26 for the processed/packaged foods industry. This doesn't mean, however, that General Mills is a perfectly safe income investment. The company still has to deal with weak demand for processed foods and food inflation before its bottom line can grow again.
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The article Better Dividend Stock: General Mills Inc. or Kellogg Company? originally appeared on Fool.com.
Leo Sun has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
