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Summary

  • Company working at expanding its international operations, which will offer growth for top and bottom lines.
  • Product innovation one among other important growth drivers for the company.
  • GIS holds position as an attractive investment option for dividend investors, and the stock offers attractive dividend yield of 3.2%.

General Mills (NYSE:GIS), one of the largest breakfast food companies in the world, produces and markets branded food in the U.S and internationally. The company, with its strategic initiatives and innovations in the product line, has been expanding its operations. Moreover, its international segment, despite tough competition, remains an important growth driver. The focused approach on yogurt expansion and innovation is benefiting the international segment, and growth in the international segment is likely to remain attractive. Also, the company offers an attractive dividend yield of 3.20%. Additionally, based on my price target of $62, the stock offers a potential price appreciation of 19%.

Geographical Diversification to Provide Growth
GIS operates in two main divisions - the U.S. and international segments. The U.S. market offers lower growth as the market is matured. However, the international market offers great growth prospects. The company recently reported weak financial performance for 3QFY2014. A harsh winter heated up competition in the food sector and investments in yogurt adversely affected the company's earnings. Declining revenues witnessed for the U.S. segment are a worrying sign for GIS.

However, the company has been keenly pragmatic about the ample room that remains for future growth in international markets. The company has diversified its portfolio with investments in new businesses around the globe, which will positively impact its top and bottom line results in the future. GIS has been making investments to expand its international operations. I believe that going forward the international segment will continue to remain an important growth driver as investments will offer solid results, strengthening the revenue base of GIS. As the company continues to make efforts to strengthen and expand its international operations, its contribution toward net sales will also increase. The following chart shows revenue contribution by different segments.

Source: Company's Annual Reports

The following chart shows the increasing net sales trend for GIS.
(click to enlarge)
Source: Company's Annual Report

The following table shows revenue growth for U.S. and international segments for GIS.

4Q FY2013

1Q FY2014

2Q FY2014

3Q FY2014

U.S. Sales (% increase)

2%

3.6%

(0.7%)

(1.7%)

International Sales (% increase)

27%

21%

1.6%

2%

Source: Company's Quarterly Earnings Report

Acquisitions of Yoki Alimentos S.A in Brazil and Yoplait in Canada have been beneficial, contributing well toward net sales. With these strategic acquisitions, the company is likely to improve its sales and margins. China is among the attractive yogurt markets where yogurt sales have doubled to $8 billion in the last five years, and are expected to be more than double in the next five years.

Product Innovation Remains Important

As consumers are becoming more health conscious, food companies are aggressively working on product innovation. GIS has also been taking product innovation measures. GIS is focusing on offering products that are free from artificial preservatives and are more natural. The organization has begun generating Cheerios that don't hold any genetically modified content. With innovations like this and many others in line, GIS will be observing a gain in its volumes in the near future. As the sales volume growth for the company remains weak, product innovation will portend well for future sales volume. The following table shows sales volume growth for GIS.

4Q13

1Q14

2Q14

3Q14

U.S

(0%)

0.9%

(1.7%)

(0.9%)

International

3%

4.2%

1.8%

(1%)

Source: Company's Quarterly Reports

Return to Shareholders

The company has rich shareholder-return policies. The company managed to return approximately $1.5 billion to its shareholders in 2013, including $744 million of share repurchases and $867 million of dividends. The share buybacks are likely to fuel EPS growth for the company. The company is expecting its EPS for FY2014 to be $2.87-$2.90, as compared to $2.72 in FY2013.The following chart shows the growing EPS trend for GIS.
(click to enlarge)Source: Company's Annual Reports & Yahoo Finance

The company offers a solid dividend yield of 3.2%. The dividends have increased at a compound rate of 11% over the past five years. I believe dividends offered by the company are sustainable as they are backed by a strong cash flow base. GIS recently announced an 8% increase in its dividend. The following table shows the comparison of GIS with its peers in terms of dividend yield.

Company

Dividend Yield

GIS

3.20%

The Hershey Company (NYSE:HSY)

1.90%

Kellogg (NYSE:K)

3.0%

Source: Yahoo Finance

The following chart shows the FCF base support to dividends over the years.

Source: Company's Annual Reports

Price Target
I have calculated a price target of $61 for GIS. For my price target calculation, I have used cost of equity 5.4%, after tax cost of debt 4.5%, WACC 5.52% and a nominal growth rate of 0.5%. Based on my price target calculation of $61, GIS' stock offers a price appreciation of 19%.

2015

2016

2017

Terminal Value

FCF (IN $- Millions)

2,011

2,061

2,229

47,660

Present Value ( IN $-Millions)

1,912

1,862

1,915

40,936

*Source: Equity Watch Estimates and Calculations

Total Present Value of Firm = 1,912 + 1,862 + 1,915 + 40,936

=$46,625

Number of Shares Outstanding = 614.49 millions

Market Value of Debt = $8,600

Market Value of Equity =$46,625 - $8,600

= $38,025

Price Target = $38,025 / 614.49

= $ 62

Conclusion
I am bullish on GIS. The company has been making efforts to expand its international operations, which will offer growth for its top and bottom lines. Also, product innovation remains another important growth driver for the company, which will positively affect its sales volume. Moreover, the stock remains an attractive investment option for dividend investors as the stock offers an attractive dividend yield of 3.2%. And based on my price target calculations, the stock offers a 19% potential price appreciation.

Source: General Mills: Significant Price Appreciation Key Feature For Bullish Thesis