Grocery Store Wars: Procter & Gamble Vs. General Mills - Which Is The Best Investment?

Jun.12.14 | About: The Procter (PG)

Summary

Procter & Gamble is revamping its supply chain.

Both companies have excellent growth potential in emerging markets.

General Mills is quickly growing its Small Planet foods divison.

Both businesses have a very long history of dividend payments.

Procter & Gamble & General Mills both have dividend yields of 3% or higher.

Click to enlarge

General Mills (NYSE:GIS) and Procter & Gamble (NYSE:PG) together account for a wide array of products found in grocery stores throughout the world. General Mills focuses on food, while Procter & Gamble focuses on beauty, grooming, heath care, baby products, and disposable products. Which of these two businesses has a brighter future and makes a better long-term investment today?

General Mills: Current Events And Growth Prospects

General Mills' revenues are driven by international sales growth. International sales currently account for about 30% of General Mills' sales. This number will increase as international growth outstrips domestic (US) sales growth. A significant portion of international growth for General Mills has come from its acquisition of Yoplait in 2011.

The emergence of middle class consumers in the developing world has created a long growth runway for General Mills. Globalization and the convergence of consumer tastes coupled with emerging market growth will drive sales for the company.

In addition to international growth, General Mills' Small Planet Foods Products division is growing quickly. Sales for 2014 should grow double digits, as they did in 2013. The trend toward healthy foods is driving growth in the Small Planet Food division. Small Planet Foods brands include Lara Bar and Cascadian Farm Organic. Currently, Small Planet Foods accounts for about 2% of General Mills' revenue. The company will likely expand this division in the future through investment and acquisitions.

Management expects long-term revenue growth between 2% and 3%, slightly exceeding inflation. The company plans to repurchase around $600 million worth of shares in 2014, and has averaged around $800 million in repurchases over the last 4 years. Share repurchases should boost growth by 2% to 3%. General Mills' current dividend yield is 3%. Shareholders of General Mills can expect a CAGR of around 7% to 9% going forward from growth (2% to 3%), share repurchases (2% to 3%), and dividends (3%).

Procter & Gamble: Current Events And Growth Prospects

Procter & Gamble is divesting the Iams, Eukanuba, & Natura pet food brands. The brands are being sold to Mars Incorporated for $2.9 billion in cash. Procter & Gamble's share of the pet care industry is only about 5%. The move will not have a significant impact on the company's earnings or revenues. The move is positive for Procter & Gamble, as the company is divesting ancillary units to focus on its core businesses.

Procter & Gamble expects 3% to 4% organic sales growth going forward. Organic sales for the 3rd quarter increased 3% year-over-year. The table below breaks down growth by division.

Division

Organic Sales Growth

Beauty

2%

Grooming

1%

Health Care

0%

Fabric Care and Home Care

6%

Baby, Feminine and Family Care

2%

Total P&G

3%

Click to enlarge

Source: Procter & Gamble 3rd Quarter Earnings Presentation

Organic sales growth in Procter & Gamble's top 10 developing markets was up 8% in 2013, versus company-wide organic revenue growth of 3%. Procter & Gamble's developing markets make up 39% of total sales, while developed markets (US, Canada, Western Europe, & Japan) make up 61% of total sales. Procter & Gamble will continue to generate more of its revenue from developing markets as these markets continue to expand.

Procter & Gamble is in the midst of a manufacturing and logistics overhaul in the US. The company is shifting from having many plants that make few items each, to few plants that make many items each. The consolidation will greatly improve logistics efficiency and reduce costs, resulting in higher operating margin for the business.

Click to enlarge
Source: Procter & Gamble Goldman Sachs Presentation

Shareholders of Procter & Gamble can expect to receive a CAGR of 9% to 10% going forward from share repurchases (3%), dividends (3%), and organic revenue growth (3% to 4%). The company has a long history of rewarding shareholders, with an amazing 58 consecutive years of dividend increases.

Valuation

Procter & Gamble trades at a P/E ratio of 21.58, versus 20.05 for General Mills. Both businesses trade at a premium to their historical valuations. General Mills is slightly cheaper, but the difference is negligible.

Both businesses are trading at a valuation just higher than the S&P500, which makes sense as both business will most likely have 9% to 10% returns going forward, in line with the S&P500. These companies differ from the average S&P500 business in that they operate in slow-changing industries and have extremely powerful brands. The long-term safety of both Procter & Gamble and General Mills is higher than the average S&P500 stock, which dictates these companies should trade at a premium to the overall market.

Comparison 1: Dividend History

General Mills has paid continuous dividends without interruption for 115 years. This is among the longest streaks of any business. The company is not a "true" Dividend Aristocrat, as it has not increased its dividend each year in the last 25 years. Procter & Gamble has paid increasing dividends for 58 consecutive years.

Both businesses have a very impressive streak of rewarding shareholders through dividends. Businesses that can maintain profitable growth for several decades show evidence of a strong, sustainable competitive advantage.

Why it matters: The Dividend Aristocrats (stocks with 25-plus years of rising dividends) have outperformed the S&P 500 over the last 10 years by 2.88 percentage points per year.
Source: S&P 500 Dividend Aristocrats Factsheet, February 28 2014, page 2

Comparison 2: Dividend Yield

General Mills has a dividend yield of 3.00%, versus 3.21% for Procter & Gamble. Procter & Gamble holds a slight edge in this category. General Mills ranks at 35 out of 118 businesses with 25+ years of dividend payments without a decrease, whereas Procter & Gamble ranks at 25.

Why it Matters: Stocks with higher dividend yields have historically outperformed stocks with lower dividend yields. The highest-yielding quintile of stocks outperformed the lowest-yielding quintile by 1.76 percentage points per year from 1928 to 2013.
Source: Dividends: A Review of Historical Returns

Comparison 3: Payout Ratio

Procter & Gamble has a payout ratio of 61.50% versus a payout ratio of 52.30% for General Mills. General Mills outranks Procter & Gamble in this category. General Mills ranks at 82 out of 118 businesses with 25+ years of dividend payments without a reduction based on payout ratio, versus 94 out of 118 for Procter & Gamble.

Why it Matters: High-yield, low-payout ratio stocks outperformed high-yield, high-payout ratio stocks by 8.2 percentage points per year from 1990 to 2006.
Source: High Yield, Low Payout by Barefoot, Patel, & Yao, page 3

Comparison 4: Growth Rate

General Mills has a 10 year revenue per share growth rate of 6.84%, versus 4.04% for Procter & Gamble. General Mills' management has done a significantly better job allocating capital over the last decade versus Procter & Gamble. General Mills ranks at 31 out of 118 businesses with 25+ years of dividend payments without a reduction based on growth rate, whereas Procter & Gamble ranks at 68 out of 118.

Why it Matters: Growing dividend stocks have outperformed stocks with unchanging dividends by 2.4 percentage points per year from 1972 to 2013.
Source: Rising Dividends Fund, Oppenheimer, page 4

Comparison 5: Volatility

Procter & Gamble has a 10 year standard deviation of 17.83%, versus 17.02% for General Mills. Both businesses have exceptionally low volatility. Procter & Gamble ranks at 6 out of 118 businesses with 25+ years of dividend payments without a reduction, while General Mills ranks at 3 out of 118 based on volatility.

Why it Matters: The S&P Low Volatility index outperformed the S&P 500 by 2 percentage points per year for the 20-year period ending September 30th, 2011.
Source: Low & Slow Could Win the Race, page 3

Conclusion

Both General Mills and Procter & Gamble have solid long-term prospects. General Mills is a Top 10 stock based on the 8 Rules of Dividend Investing, while Procter & Gamble is in the top 25. Both businesses have similar overall metrics. The biggest difference between the two is General Mills has been able to grow revenue per share about 50% faster than Procter & Gamble over the last decade. Both businesses make excellent long-term investments.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.