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What are we looking for?

Sustainable dividends from a pet-food industry in consolidation.

The screen

General Mills Inc.’s US$1.2-billion acquisition of Tyson Foods Inc.’s pet-treats unit in July is just one recent consolidation move in the industry. Only weeks ago Archer-Daniels-Midland Co. announced a US$600-million deal to acquire 75 per cent of P4 Companies, maker of PetDine and other high-end pet-food labels.

Pet food – whether it’s gourmet labels such as Fancy Feast, natural products such as Blue Buffalo, or stalwart brands such as Milk-Bone – offers investors above-average growth prospects. That’s especially so as consumers, spurred by the pandemic, continue to spoil their pets.

Our search started with a list of top pet-food makers focused on lifting market share. We then applied our TSI Dividend Sustainability Rating System to home in on top dividend payers. That system awards points to a stock based on key factors:

  • One point for five years of continuous dividend payments – two points for more than five;
  • Two points if it has raised the payment in the past five years;
  • One point for management’s commitment to dividends;
  • One point for operating in non-cyclical industries;
  • One point for limited exposure to foreign currency rates and freedom from political interference;
  • Two points for a strong balance sheet, including manageable debt and adequate cash;
  • Two points for a long-term record of positive earnings and cash flow to cover dividends;
  • One point if the company’s an industry leader.

Companies with 10 to 12 points have the most secure dividends, or the highest sustainability. Those with seven to nine points have above-average sustainability; average sustainability, four to six points; and below-average sustainability, one to three points.

More about TSI Network

TSI Network is the online home of The Successful Investor Inc. – the group of widely followed Canadian investment newsletters by editor and publisher Pat McKeough. They include our award-winning flagship newsletter, The Successful Investor. The TSI Best ETFs for Canadian Investors is the latest. TSI Network is also affiliated with Successful Investor Wealth Management.

What we found

Leading pet food makers

Ranking*CompanyTickerDiv. Sustain. RatingPointsDiv. Yld. (%)Mkt. Cap. (US$ Bil.)1Y Ttl. Rtn. (%) Recent Price (US$)
1General Mills Inc.GIS-NHighest103.435.91.560.77
2Nestle SA (ADR)NSRGY-OTCHighest102.1333.81.1120.31
3Colgate-Palmolive Co.CL-NAbove Average92.364.01.177.08
4J.M. Smucker Co.SJM-NAbove Average83.213.08.1122.16
5Archer-Daniels-MidlandADM-NAbove Average82.433.832.260.78

Source: Dividend Advisor. *Ranking is determined by TSI Dividend Sustainability Score. Where overall points are the same, analysts considered P/E, dividend yield and industry outlook to decide final placements.

Our TSI Dividend Sustainability Rating System generated five stocks.

With the addition of Tyson’s pet-treat brands, Minnesota-based General Mills continues to build on its US$8-billion acquisition of Blue Buffalo Pet Products in 2018. Food-processing giant ADM, headquartered in Chicago, has long supplied ingredients to pet-food makers but is now selling its own pet treats. Ohio’s packaged-food maker J.M. Smucker Co. continues to see strong sales for well-established brands Milk-Bone and Meow Mix. New York-headquartered Colgate-Palmolive Co., best known for its personal-care products and toothpaste, also owns Hill’s Pet Nutrition – with its leading Science Diet and Prescription Diet brands. Finally, Switzerland’s Nestlé SA food conglomerate has a dominant global position through its Purina unit, and its Alpo, Fancy Feast and Friskies labels.

We advise investors to do additional research on any investments we identify here.

Scott Clayton, MBA, is senior analyst for TSI Network and associate editor of TSI Dividend Advisor.

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