General Mills and Campbell's: Assessing the Value of Two Consumer Staples Giants

For the disciplined investor, a high dividend yield is not an invitation to buy. It is often a warning sign. The average stock in the S&P 500 offers a modest 1.1% yield, while giants like General Mills trade at a 5.4% yield. This gap is not a bargain; it is a trade-off. As Morningstar strategist Dan Lefkovitz notes, "High dividend yields are often found in risky sectors, industries, and companies". A juicy payout can signal underlying business problems, not a hidden value.

The true test of a dividend stock is its durability. The best companies are those with competitive advantages, or economic moats, that protect their cash flows and allow them to pay and grow dividends for decades. David Harrell of Morningstar DividendInvestor emphasizes that "we have seen some very strong correlations between economic moats and dividend durability". This is the core of the value approach: prioritize the quality of the payout over its size. A company with a narrow moat and a 2% yield, managed by a team committed to returning capital, is often a superior investment to one with a 5% yield but no clear path to sustaining it.

This leads to the ultimate goal: compounding value. The Dividend Kings-companies like Coca-Cola and PepsiCo that have raised dividends for over 50 consecutive years-exemplify this. Their ability to steadily grow earnings and cash flow, even during economic contractions, allows them to compound shareholder returns over generations. As the evidence notes, "Investors buying reliable Dividend Kings can expect the yield on their initial investment to grow over time". For the patient investor, this long-term compounding power is far more valuable than a single high yield, which may be unsustainable.

In this light, General Mills and Campbell's present a classic value puzzle. Both offer yields that are multiples of the market average, suggesting the market sees risks. The investor's task is to assess whether those risks are priced in, or if the companies' enduring brands and cash-generating power can still provide a margin of safety. The answer lies not in the headline yield, but in the depth of their moats and the quality of their future cash flows.

Business Fundamentals and Recent Headwinds

The recent performance of both General Mills and Campbell's reveals a sector under significant pressure, testing the durability of even the strongest brands. For the value investor, this is a critical moment to assess whether the current price reflects a temporary setback or a permanent erosion of the competitive moat.

General Mills has delivered a stark warning. The company recently sharply cut its fiscal 2026 earnings guidance, with adjusted EPS now projected to decline 16% to 20%. Management explicitly cited weak consumer sentiment and a shift in spending toward private labels as key reasons. This is a classic sign of a business facing a "trade-down" dynamic, where economic pressure forces shoppers to choose cheaper alternatives, directly threatening premium brand pricing power. The company's response-pointing to $100 million of efficiency savings and reaffirming its dividend-shows a focus on cost discipline to protect cash flow, but it does not solve the underlying demand challenge.

Campbell's shares tell a similar story of sustained pressure. The stock is down 3.1% year-to-date and 29.2% over the last year, a decline that reflects ongoing sector-wide headwinds. This isn't a one-quarter blip; it's a multi-year trend that has seen the share price fall 42.5% over three years. The market's verdict is clear: investors are pricing in persistent challenges to earnings resilience and brand relevance in a crowded, promotional environment.

The valuation context, however, is where the deep value story begins. Both stocks are down over 50% from their all-time highs, trading at price-to-free-cash-flow multiples near their 10-year medians. This suggests the market has already baked in significant business headwinds, leaving little room for further disappointment on that front. The question for the patient investor is whether these multiples now offer a sufficient margin of safety, given the quality of the underlying cash-generating assets and the companies' ability to navigate this difficult cycle. The recent guidance cuts and share price declines underscore the reality of the headwinds, but the valuation levels hint that the worst may be priced in.

Dividend Safety and Capital Allocation

For the value investor, the dividend is a crucial signal of management's confidence in the business's future cash flows. Both General Mills and Campbell's are paying out a significant portion of their earnings, but the sustainability of those payouts now faces a common test: a prolonged consumer spending slowdown.

General Mills has made its capital allocation priorities clear. Despite sharply cutting its earnings outlook, management has reiterated its focus on efficiency savings and its commitment to supporting dividend payments. The company is banking on its planned $100 million in cost reductions to protect cash flow and fund the dividend. This disciplined approach-prioritizing cost discipline over growth investments during a downturn-is a hallmark of a company trying to preserve its financial fortress. The risk, however, is that the savings must be substantial enough to cover the projected 16-20% EPS decline, leaving little room for error if consumer weakness deepens.

Campbell's presents a more complex picture. The company boasts a long history of shareholder returns, with a current dividend yield of 5.29%. Yet its recent performance raises questions about the durability of that payout. The stock's steep decline over the past year and three years suggests the market is pricing in persistent challenges to earnings resilience. While Campbell's has not cut its dividend, the pressure on its brands in a crowded, promotional environment could eventually force a difficult choice between maintaining the payout and funding necessary reinvestment. The high yield, in this context, may reflect a market assessment that the dividend's future is less certain than its past.

The primary risk for both companies is the same: a prolonged consumer spending slowdown that pressures pricing power and erodes their competitive moats. When shoppers trade down to private labels or wait for discounts, even the strongest brands face margin pressure. This dynamic threatens the very cash flows that support dividends. For the patient investor, the current valuation levels-both stocks trading at price-to-free-cash-flow multiples near their 10-year medians-suggest the market has already discounted this risk. The question is whether the companies' brands and cost structures are strong enough to weather the storm without sacrificing the dividend. The commitment to cost savings at General Mills and the high yield at Campbell's are both signs of a capital allocation strategy focused on preserving shareholder returns, but the ultimate test is how well those strategies hold up in a tougher economic cycle.

Valuation and Forward Catalysts

For the value investor, the current price of both General Mills and Campbell's is the starting point for a calculation of intrinsic value. The market has already discounted a severe near-term earnings hit, with General Mills cutting its fiscal 2026 EPS outlook by 16-20% and both stocks trading at price-to-free-cash-flow multiples near their 10-year medians. This creates a potential margin of safety, but only if the companies' underlying cash-generating power is strong enough to support it through the cycle. The key question is whether today's depressed prices are a temporary mispricing or a reflection of a permanently lower earnings trajectory.

The specific catalysts that will validate or invalidate the thesis are clear and immediate. For both companies, the primary driver is stabilization in organic net sales. This means halting the reported decline in demand and, ideally, seeing a return to modest growth as consumer sentiment improves. Management at General Mills is banking on this, pointing to its $100 million of efficiency savings to protect cash flow and support the dividend. The success of this plan is the first test. If sales continue to fall while costs rise, even $100 million in savings may not be enough to maintain the payout. Investors must monitor quarterly reports for any signs that the trade-down pressure from private labels is easing.

Beyond the company's own actions, the external environment is critical. The market is watching for shifts in weak consumer sentiment and the broader trend of shoppers favoring private-label products. Any stabilization in these macro trends would be a positive signal for the entire branded food sector. Conversely, further deterioration would likely force more aggressive promotional activity, squeezing already thin margins and threatening the dividend.

The bottom line is that intrinsic value is not a static number but a function of future cash flows. A conservative estimate would discount the sharply lowered near-term earnings and apply a lower growth rate for the foreseeable future. If the current stock price trades significantly below that adjusted valuation, a margin of safety exists. However, that safety is contingent on the forward catalysts materializing. The dividend commitment at General Mills and the high yield at Campbell's are not guarantees of safety; they are management's bets on navigating the cycle. For the patient investor, the current setup offers a chance to buy a business with a durable brand at a price that assumes a difficult path ahead. The margin of safety is in the price, but the path to realizing it depends entirely on the stabilization of sales and the successful execution of cost savings.