The past few years have not been kind to General Mills (GIS). The company’s sales fell in 2015, 2016, and through the first half of fiscal 2017.

As a global company, General Mills has been hurt by the strong U.S. dollar, which makes exports less competitive.

Of greater concern, however, is the deterioration across some of the company’s major brands.

The company’s deteriorating financial position means it is reasonable to question whether its dividend growth can continue.

General Mills has paid a dividend to shareholders for more than 100 years. And, it is a Dividend Achiever, a group of 272 stocks with 10+ years of consecutive dividend increases.

Fortunately, General Mills is developing new products designed to meet the changing needs of the marketplace, and has reaped strong growth from acquisitions.

General Mills is still highly profitable, and stands a good chance of returning to growth up ahead. For these reasons, investors should still expect a nice dividend increase in 2017.

Business Overview

General Mills was formed more than 150 years ago, as a single flour mill.

Since then, the company has steadily broadened its product portfolio over time. General Mills is now a diversified food and beverage giant.

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Source: Company website

The company operates in three core segments:

• S. Retail (62% of sales)
• International (27% of sales)
• Convenience Stores & Foodservice (11% of sales)

The major challenge for General Mills is that consumers, particularly in the U.S., are purchasing less shelf-stable packaged goods, in favor of fresher foods like organics.

This is why General Mills’ revenue declined 1.6% in 2015, and then dropped 6.1% in 2016.

Things aren’t off to much of a better start in fiscal 2017. In the second quarter, net sales and diluted earnings-per-share declined 7% and 8%, respectively, from the same quarter the previous year.

Unfavorable currency exchange is having a significant impact on General Mills’ top-line deterioration. For example, net sales declined by an additional 3% last quarter, just because of the strong U.S. dollar.

However, sales are declining, even when excluding foreign exchange. Last quarter, organic sales still declined 4% year over year.

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Source: 2Q 2017 Earnings Presentation, page 7

Specifically, General Mills is seeing weakness across several major categories within its core U.S. retail segment. For example, sales of baking products, yogurt, and meals declined 7%, 17%, and 17% last quarter, respectively.

General Mills is seeing intensifying competition across these categories, from new players. For example, the rising popularity of Greek yogurt is pressuring General Mills’ Yoplait brand.

The good news is that General Mills is taking action. It is aggressively cutting costs to raise cash, which it is using to enter high-growth categories like natural and organic foods.

Growth Prospects

First, General Mills is making a huge push into organics. It primarily did this by acquiring Annie’s for $820 million.

Annie’s has a full product line-up, and its growth is extremely impressive. Annie’s sales doubled from fiscal 2010-2014. Management expects Annie’s sales to double again, from fiscal 2014-2017, indicating an accelerating growth rate.

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Source: 2Q 2017 Earnings Presentation, page 33

Annie’s retail sales grew 46% last quarter.

With Annie’s, as well as other brands like Liberte, Muir Glen, and Cascadian Farms, General Mills expects to achieve $1 billion in natural and organic product sales by fiscal 2019.

This would be a huge accomplishment for General Mills, since the company’s natural and organic portfolio generated just $50 million in sales in 2000.

In response to falling sales, General Mills launched an aggressive cost-cutting program to stabilize profitability. This has worked, in the sense that the company’s margins are increasing, which is helping to grow adjusted earnings-per-share.

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Source: 2Q 2017 Earnings Presentation, page 12

Among the cost-cutting initiatives launched, General Mills announced a new global operational structure. In addition, the company announced it will close 11 plants.

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Source: 2Q 2017 Earnings Presentation, page 18

These actions are projected to results in $500 million in cost savings in 2017, and $700 million in savings next year.

Adjusted earnings-per-share, which excludes various non-recurring items such as divestitures and currency impacts, rose 2% over the first half of fiscal 2017.

This might seem like an inconsequential figure, but growth in adjusted earnings-per-share is critical for the dividend. As long as General Mills can manage earnings growth, the company stands a good chance of passing along a dividend increase this year.

Dividend Analysis

Despite General Mills’ falling sales, the company generates high profit margins. Its ability to grow profitability is how the company continued to raise its dividend in recent years.

In fiscal 2016, General Mills reported adjusted earnings-per-share of $2.92. Its current annualized dividend is $1.92 per share.

Consequently, General Mills is carrying a trailing payout ratio of approximately 66%. It is distributing about two-thirds of earnings-per-share, which is fairly typical in the consumer goods sector.

Therefore, there is still room for a modest dividend increase in 2017. Investors should not get their hopes up for a double-digit increase. Given the fundamental challenges facing the company, it is likely the company will remain conservative with the dividend.

That being said, General Mills can at least provide a dividend increase that exceeds inflation. A raise in the 4%-6% range would protect investors’ purchasing power, and not endanger the company’s ability to invest in growth initiatives.

General Mills raised its dividend by 4% in 2016. A similar increase should be expected, with the chance of a slightly higher raise.

The company has made progress over the past year in its cost-cutting program, and new products like Annie’s are taking off.

A 4%-6% dividend increase would elevate General Mills’ annualized dividend payout to roughly $3.03-$3.09 per share.

Final Thoughts

This is a period of transformation for General Mills. Changing consumer tastes have forced the company to expand into new product categories.

Over the past century, General Mills has proven the ability to adapt to a changing environment. It has stood the test of time, and its recent turnaround efforts will likely prove successful.

While investors should expect another modest dividend increase this year, it remains highly likely General Mills will raise its dividend again in 2017.