I have owned stock in General Mills (NYSE:GIS) for a while now, as part of my dividend growth portfolio. So far, I have been reasonably happy with the investment, but I like to take a look at the outlook for each of my holdings every 6 months. My most recent purchase of General Mills stock was on February 6th at $46.86. The consumer staples behemoth produces and sells everything from cereals and yogurt, to frozen pizza and dessert mixes. From its Minneapolis, Minnesota headquarters, General Mills sells and distributes its brands around the US and internationally. The company has a multi-decade history of steadily providing value to shareholders as well as raising its dividend. Now let's take a look at the company's outlook.
As I documented in my recent Seeking Alpha article (These Consumer Staples Companies are Getting Squeezed), the whole consumer staples sector is facing a myriad of headwinds. The last two quarterly results General Mills reported have been somewhat disappointing. Some of the immediate struggles facing the sector include:
Reduced Breakfast Cereal Consumption
Higher Food Input Costs
Financially Struggling consumers
These companies are having a hard time passing along their higher input costs to the retail consumer. Research suggests that most middle and lower class consumers have less disposable income than they did prior to the financial crisis. On a personal note, I know my family has less disposable income than we did 5 years ago. These two forces have caused consumer staples companies (including General Mills) to try to innovate their product mix, while at the same time trying to defend their profit margins. If food inflation continues, these struggles could get even worse.
The struggles above not withstanding, General Mills has had an excellent track record for providing value to shareholders over the past decades. More recently, the company has more than doubled its dividend in the past 10 years and reduced the number of outstanding shares in each of the past 9 years. For a graphical representation, take a look at the 10 year chart (below) from GuruFocus.com.
General Mills' return on equity [ROE] has ranged from 18.9 to 28 over the past 10 years. As of the end of 2013, the dividend payout ratio was a very reasonable 47%, which leaves room for future dividend raises. By my calculations, earnings per share have risen an average of 9% per year over the past 10 years. That's pretty good considering the slow growth of this mature sector, and the fallout of the financial crisis. A discounted cash flow model (assuming a 9% growth rate and 5% discount rate) results in a value of roughly $77 for the next 20 years of General Mills' earnings. Recognizing that there are several large assumptions in that model, I would want to buy at a 40% discount to that price, resulting in a price of roughly $46 per share.
As mentioned in the opening paragraph, General Mills has a well-diversified product line. As you can see in the graphic below (from General Mills' 2013 annual report), a variety of products make up its sales mix. The largest segment, and arguably what General Mills is best known for, is the cereal group (21% of sales). What excites me is to see that Convenient Meals, Yogurt, and Snacks each comprise another 15% of total sales. This mix makes General Mills' sales much more stable than if one segment comprised 50% or 60% of sales. Especially if that segment was in decline.
General Mills is also somewhat diversified geographically. Roughly 25% of sales were made internationally in 2013. In the orange chart below (also taken from General Mills' 2013 annual report), you can see the composition of those international sales. I do wish the company had more exposure to emerging and developing countries, but it does not, so I began accumulating shares of Unilever (NYSE:UL) in February. As an aside, click this LINK to read a Seeking Alpha article on why I chose Unilever.
The graphic below also shows a breakdown of US retail sales. As you can see, while cereals comprise the largest segment (at 22%), the next 6 segments are pretty well-balanced. This is important when I'm looking at an investment, because it's inherently risky to have the majority of sales coming from one product line. With cereal consumption in decline in the U.S., I feel comfortable these other segments will pick up the slack.
Price and Valuation
Last, but certainly not least, we need to discuss General Mills' current stock price and valuation. The consumer staples sector, including General Mills, faces some struggles in the coming years. In all of my investments, I look to buy companies at a discount to their future earnings. As mentioned above, I recently bought some shares at $46.86. You may be wondering how the current valuation stacks up against the historical averages? In the Morningstar.com table below, we can see that General Mills is currently selling at a premium to its historical averages. The stock closed in the $51 range on 4/8/14. Given that price and the rich comparisons to its own historical averages, General Mills' stock price will need to decline before I purchase additional shares. I am pleased with the shares I currently own, and am not looking to sell them at this time. I am confident that General Mills will continue to grow and profit for decades to come.
Disclaimer: This article is for informational purposes only and should not be considered a recommendation for anyone to buy, sell, or hold any equities. I am not a financial professional. The information above is provided by Yahoo Finance, Morningstar.com, GuruFocus.com, and www.generalmills.com/
Disclosure: I am long GIS, UL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.