General Mills: Safety, Growth, & 3%+ Dividend Yield All In One Tasty Investment by Sure Dividend
Odds are you have not one, but several General Mills (GIS) products in your kitchen today.
The following brands are owned (or partially owned) by General Mills:
- Lucky Charms
- Cascadian Farms
- Nature Valley
The food industry does not go through rapid technological changes. The slow rate of change in food gives General Mills great stability. Case-in-point, the company has paid dividends for 116 consecutive years. That’s one year longer than the oldest living person.
In a rare interview with Harvard Business School that was published online earlier this month, (it has since been taken down) value investor Seth Klarman spoke at length about his investment process, philosophy and the changes value investors have had to overcome during the past decade. Klarman’s hedge fund, the Boston-based Baupost has one of Read More
If you are looking for stability, look no further than General Mills.
General Mills currently has a market cap of $34 billion and an above-average dividend yield of 3.1%. The company has grown its earnings-per-share at 8.4% a year over the last decade. General Mills has historically been a winning combination of high yield, growth, and stability.
With that said, General Mills had a difficult fiscal 2015. The company grew constant-currency adjusted earnings-per-share just 4% in fiscal 2015, well below the company’s long-term growth rates. General Mills’ growth slowed due to weakness in cereal. Weakness in 2015 has made some potential investors pause and think before investing in General Mills.
The company appears to have corrected itself, however. General Mills’ 4th quarter results showed constant-currency adjusted earnings-per-share growth of 18%. Here’s how the company plans to continue growing.
General Mills’ Future Growth Plans
71% of General Mills’ operating profits in 2015 came from the United States. Saying that the United States is important to General Mills is an understatement. The company must experience growth in the United States to be successful.
The company has identified 4 key growth drivers to push United States sales forward over the next several years:
- Grow cereal
- Accelerate yogurt and snacks
- Drive double-digit growth on natural and organic portfolio
- Deliver consumer first value on key brands
General Mills is refocusing many of its brands on health benefits. Consumer demands have changed, and General Mills is changing with them.
The image below shows how General Mills is focusing on health.
How General Mills is Growing Cereal
General Mills controls many iconic cereal brands, including: Cheerios, Chex, Trix, Wheaties, Lucky Charms, and Count Chocula, among others.
The entire United States cereal industry has stagnated over the last several years. Consumers are either skipping breakfast, switching to on-the-go options, or looking for healthier alternatives to the high-fructose-corn-syrup laden multi-colored cereal offerings of old.
General Mills has recognized the trend in cereal. The company is now focusing on the health aspects of its cereals. The company’s Cheerios packaging now proudly displays that it is ‘Gluten Free’. Lucky Charms is going gluten free as well in the second half of fiscal 2015.
The company is also removing high fructose corn syrup, colors from artificial sources, and artificial flavors from its cereals.
General Mills currently controls 31% of the ready-to-eat cereal market in the United States. The other big player in the United States cereal industry is General Mills rival, Kellogg (K). The company is going ‘all in’ on health. General Mills has seen its market share of the cereal industry rise in 2013, 2014, and 2015. The company will likely continue to gain market share as it focuses on giving consumers what they want.
How General Mills is Growing Natural & Organic Products
One of the biggest growth drivers for General Mills in the United States is the company’s excellent portfolio of Natural/Organic brands. General Mills owns the Annie’s, Food Should Taste Good, Cascadian Farms, Plenti, Nature Valley, and LARA Bar brands.
General Mills has compounded natural and organic sales at 19% a year from 2000 through fiscal 2015. The company is targeting sales of $1 billion from natural organics in 2020, up from $675 million in fiscal 2015. This comes to a compound annual growth rate of 8.2% a year in the category.
The company will continue to grow its natural and organic sales through greater expansion of its brands in these categories. Since General Mills acquired Annie’s, the company has rapidly expanded its brand into a wide variety of categories. General Mills will likely continue to expand the Annie’s brand into new categories, along with its other health brands.
Safety & Recession Performance
Home-prepared food is one of the few items people don’t cut back on during recessions. General Mills increased revenue, earnings, and dividends each year from 2007 through 2009 during the Great Recession. The company is highly insulated from the effects of economic downturns.
General Mills is highly leveraged. The company has $10.3 billion in debt on its balance sheet, and ‘only’ $784 million in cash. However, General Mills is at absolutely no risk of defaulting on its debt. The company currently as an interest coverage ratio of over 8x. General Mills highly stable cash flows allow it to take on fairly high leverage without significantly increasing risk of bankruptcy.
Is General Mills Overvalued?
Some websites show that General Mills currently has a price-to-earnings ratio near 30. Don’t be misled; the company is not that expensive.
GAAP earnings for the company’s last 12 months total $186.8 million. Adjusted earnings total $465.1 million. The biggest discrepancies in the numbers are a $78.6 million one-time tax hit, and 1 $176.9 million hit from asset impairment on the green giant brand. The company’s adjusted earnings give a much better view of General Mills’ real earnings power.
Using adjusted earnings, General Mills is currently trading for a price-to-earnings ratio of 20.1. The company is trading around in line with the S&P 500. General Mills is likely fairly valued at this time given its future growth prospects, high yield, and low risk (in relation to most other stocks).
Total Return and Final Thoughts
General Mills’ management is targeting long-term earnings-per-share growth of 7% to 9% a year. The company has grown earnings-per-share in this range over the last decade. It is highly likely that General Mills will be able to achieve earnings-per-share growth in this range going forward.
The company currently has a 3.1% dividend yield and a payout ratio of 62.2% (using adjusted earnings). General Mills will likely grow its dividend payments in line with 7% to 9% earnings growth going forward. Investors should expect total returns of between 10% and 12% a year from General Mills stock. Returns will come from dividends (~3%) and earnings-per-share growth (7% to 9%).
General Mills has long been a favorite of The 8 Rules of Dividend Investing. The company has an appealing combination of growth, high yield, and safety that is appealing to dividend growth investors.