General Mills' Brand Equity Erosion and Dividend Sustainability: A Cautionary Tale of Capital Allocation and Long-Term Value Erosion

General Mills, a titan in the consumer packaged goods sector, has faced mounting challenges in maintaining its brand equity and financial resilience over the past five years. From fiscal 2020 to 2025, the company's core North America Retail (NAR) segment-responsible for 61% of its total revenue-experienced a 5% reported sales decline in 2025, driven by shifting consumer preferences and aggressive pricing strategies that outpaced affordability. While the company has made strides in innovation and cost optimization, its long-term value erosion and capital allocation decisions raise critical questions about the sustainability of its dividend policy.

The Erosion of Brand Equity: A Structural Challenge

General Mills' brand equity has been under pressure due to a confluence of factors. The company's reliance on staple products like breakfast cereals and frozen meals has exposed it to a broader industry trend: declining demand for processed foods in favor of fresher, health-conscious alternatives. This shift has been compounded by margin pressures from rising input costs, which forced the company to implement price hikes. However, these price hikes, while initially offsetting cost increases, may have alienated price-sensitive consumers, leading to volume declines.

DCF analysis suggests that General Mills' stock is trading at a 56.4% discount to its intrinsic value, implying significant undervaluation. Yet, this valuation disconnect may reflect investor skepticism about the company's ability to reverse its brand equity erosion. For instance, while the pet food segment-acquired through the 2018 Blue Buffalo deal-showed organic growth in Q4 2025, the broader NAR segment remains a drag, with only 64% of top 10 U.S. categories achieving pound share growth in the same period.

Capital Allocation Missteps and Financial Leverage

General Mills' capital allocation strategy has been a double-edged sword. On one hand, the company has prioritized cost optimization, including a $100 million global transformation initiative by 2028. On the other, its debt-to-equity ratio of 1.52 as of August 2025-well above the industry median of 0.4-signals heightened financial leverage. This leverage, coupled with declining operating cash flow (down to $2.9 billion in 2025 from $3.3 billion in 2024), raises concerns about its ability to fund innovation and maintain dividend payouts.

R&D spending, a critical driver of long-term brand equity, has also shown volatility. While the company reported $256.6 million in R&D expenses for 2025, this marked a 0.5% decline from 2024. Such trends suggest a potential underinvestment in innovation, particularly as competitors like Kellogg's and Nestlé double down on fresh and functional food categories.

Dividend Sustainability: A Delicate Balance

General Mills has maintained a consistent dividend policy, with a payout ratio of 45.6% as of October 2025-lower than the Consumer Defensive sector average of 59.8%. However, the company's declining sales and operating cash flow pose risks to this sustainability. For example, fiscal 2025 saw a 2% drop in net sales to $19.49 billion, with adjusted operating profit and EPS declining by 7%. While the current dividend yield of 5.13% is attractive, it is supported by a payout ratio that may become unsustainable if earnings continue to contract.

The company's capital allocation framework, which emphasizes "remarkability" through brand reinvestment and ESG initiatives, aims to restore growth. Yet, with projected declines in adjusted operating profit and EPS for fiscal 2026, the margin of safety for dividend payments is narrowing.

Conclusion: A Reckoning for Long-Term Value Creation

General Mills stands at a crossroads. While its strategic pivot toward innovation and cost optimization is commendable, the structural challenges of brand equity erosion and capital allocation missteps cannot be ignored. The company's high debt load, declining R&D investment, and exposure to commoditized product categories create a fragile foundation for long-term value creation. For dividend investors, the current yield is enticing, but the sustainability of payouts hinges on the success of its transformation initiatives and the ability to reverse declining consumer sentiment.

As the company navigates fiscal 2026, stakeholders must closely monitor its progress in balancing short-term profitability with long-term brand reinvention. Until then, General Mills' stock may remain a high-yield, high-risk proposition.