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General Mills: Close To Being Generally Interesting For Value Investors

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When thinking about General Mills (GIS) you likely associate the company with its flagship cereal brands like Cheerios, Wheaties and Lucky Charms – Cheerios alone controls roughly 13% of the cereal market. Yet the company also has an abundance of additional powerhouse brands under its corporate umbrella. For instance, Betty Crocker, Bisquick, Gold Medal, Pillsbury, Haagen-Dazs, Green Giant, Hamburger Helper, Totino’s, Nature Valley, Progresso, Yoplait and many more names all send their proceeds to the century and a half old incorporation that is General Mills.

As such, you might imagine that the company’s profits are quite consistent. In viewing the business through the lens of the fundamentals analyzer software tool, or F.A.S.T. Graphs™, we can see that this has indeed been the case.

Sure there have been some down years – 4 since the end of 2000 – but in general (no pun intended) General Mills has been reasonably consistent. Over this time period operating earnings have grown by just under 7% a year, as profits and dividends march higher over the long-term.

General Mills

If valuations were relatively reasonable during the start and end time periods, you might expect an investor’s rate of return to follow the business results of the company. Again, this is precisely what we observe. Operating earnings grew by 6.8% per year, while the stock price increased by a compound rate of 6.3% – indicating that the beginning earnings per share multiple was slightly higher than the ending multiple. In actuality, General Mills traded at about 21 times earnings at the end of 2000 as compared to a multiple closer to 17 today. Over the long-term price generally capitalized earnings at a relatively constant rate and the dividend provided a bit of additional return – bumping the total return over this period to almost 8% per annum. Which – by the way – was over twice the rate that the S&P 500 index returned during the same period.

Thus even without knowing the day-to-day or even year-to-year prices, you can get a reasonable feel for both how the company has been performing and how the market has valued the company over the long-term. Since 2000, General Mills has grown earnings per share in the 6-7% range, while an investor would have seen return results in the 7-8% range – clearly there’s a relationship between the two.

When we view the Earnings and Price Correlated F.A.S.T. Graph, the relationship becomes undeniable – where earnings go, price eventually follows in the long run.

With the above being stated, it’s also interesting to note the company’s commitment to rewarding shareholders – both through share repurchases and dividends. On the share buyback front, General Mills has been especially consistent over the last decade reducing common shares outstanding (csho) from about 756 million to today’s mark closer to 624 million – a reduction rate of almost 2% per year. Additionally, the company still has an authorization to repurchase roughly 5% of the current shares outstanding.

On the dividend side, management has been especially consistent. Most to this point was the board’s decision to increase the dividend 8% on March 11th of 2014 from $0.38 to $0.41 per quarter. This is the 15th time the company has announced a dividend increase in the last decade – for a double digit growth rate over the last 10 years. Granted this isn’t as impressive as the half century dividend increase streaks of say Coca-Cola (KO) or Proctor & Gamble (PG). Yet the accompanying commentary by Chairman and CEO Ken Powell should provide an income oriented investor with a bit of comfort:

“General Mills and its predecessor firm have paid dividends without interruption or reduction for 115 years. This track record is testimony to the strong and steady operating cash flows generated by our consumer food brands. We expect dividends to grow with earnings over time, and we see this dividend growth as a key component of our long-term shareholder return model.”

Thus the question today isn’t likely to be whether or not the firm is committed to rewarding shareholders. Rather, the question becomes: what are the future prospects of the business and how does the current valuation reflect these projections?

To this point, the Estimated Earnings and Return Calculator can provide some potential insight. Now, it’s paramount to consider the idea that this is a calculator – it simply defaults to the consensus of estimates as reported to Standard & Poor’s Capital IQ. However, it does provide a solid baseline for how analysts are presently viewing this company. In the case of General Mills, there are 4 years of fiscal estimates being provided in addition to a long-term growth rate of 8%. If you were to double check these numbers against other data sources, they appear more than reasonable.

The calculator suggests that if these earnings forecasts materialize and General Mills is trading at 15 times earnings in the future, this would equate to an 8.6% annualized growth rate for the next 5 years – including dividends. In other words, the forecasted return results are expected to be in line with the company’s operating results over the intermediate-term.

Sure, this isn’t overly impressive, but then again that’s why the title of this article wasn’t “Why you should buy General Mills now!” or something of the sort. In relation to its historical valuation, General Mills is trading slightly above where it normally has. In addition, the company’s share price has increased much faster than its growth rate in the past few years.

However, there are two things to remember. First, as demonstrated above and observed in your local cereal aisle, General Mills has been an incredibly consistent company. More than that, as of late it seems that the commitment to shareholders has been increasing.

Perhaps just as important is the idea that reasonable return results can still be had at loftier valuations. For instance, General Mills traded at 21 times earnings at the end of 2000 but was still able to provide index beating return results close to 8% per annum, despite the P/E compression. Today shares trade in the 17-18 P/E range. If the multiple stays where it is today, it’s possible that the 5-year return results would be higher than what the calculator estimates. Yet even if the P/E does compress, it might be comforting to know that this does not necessarily preclude one from solid returns.

Of course none of this is to suggest that the company is without risks. In the company’s 10-K General Mills lists no less than 20 risk factors – which includes anything from volatile input costs and political risks to changing consumer preferences and the potential for product liability claims. Business partnerships contain risks, plain and simple.

Overall we feel that General Mills has been an especially consistent company – a fact we’d contend is hard to argue given its history. Moreover, during the last decade General Mills has shown an increased propensity to reward shareholders through share repurchases and dividends. Additionally, the company is expected to grow at a solid clip moving forward. Taken together, these ideas alone represent a sensible baseline for further due diligence. However, it’s important to underscore that they only demonstrate one side of the equation. When you add price in, you find that shares are presently trading a bit higher than they have in the recent past. As we have demonstrated, this does not preclude one from reasonable returns. But obviously as you buy shares lower – economics constant – the “safer” a security becomes. Perhaps this time will come next week, next year or not at all. In any event, if this time comes, the patient investor might see General Mills’ shares getting closer to being generally interesting.

Disclosure:  Long GIS, PG, KO at the time of writing.

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