The Future Of General Mills

Jul. 1.14 | About: General Mills, (GIS)

Summary

General Mills has not reduced its dividend in 114 years.

The company has revenues of nearly $18 billion per year.

General Mills is revamping its US Cereal Brands.

The company is strengthening its yogurt marketing.

Disappointing 4th quarter results mask long-term strength.

General Mills (NYSE:GIS) sells about $18 billion in food products each year. The company has a strong international presence with products in over 100 countries. General Mills has a strong brand portfolio including: Cheerios, Betty Crocker, Pillsbury, Green Giant, Yoplait, Nature Valley, Old El Paso, and Haagen-Dazs. The company has an amazing streak of 114 years of dividend payments without a reduction.

Source: General Mills Factsheet

4th Quarter & Full Year Results

General Mills posted disappointing 4th quarter results. Sales for the 4th quarter of 2014 were down 3% compared to sales for the 4th quarter of 2013. Sales were down due to lower volume (-2%) and foreign currency exchange rates (-2%) but were offset by higher prices (1%). Adjusting for foreign exchange rates, sales decreased 1% on a quarter over quarter basis. For the full year, sales increased 1% and adjusted diluted earnings per share increased 4%.

Source: General Mills 4th Quarter News Release

Future Growth Plan

General Mills expects mid single digit revenue growth and high single digit earnings per share growth. The company plans to repurchase 3% to 4% of shares outstanding which would cost between $1 billion to $1.3 billion at today's prices.

Source: General Mills 4th Quarter Presentation

General Mills' operations are divided into 3 segments: US Retail, Convenience Store, & International. The company expects mid single digit revenue growth in the convenience store segment, and high single digit growth in the company's international segment.

The US Retail segment accounts for about 60% of the company's overall revenue. General Mills expects US Retail segment revenue growth in the mid single digits. The company plans to achieve growth in the US by:

  • Investing in cereal for growth
  • Returning yogurt to growth
  • Accelerating better-for-you snacking
  • Sustaining momentum on Hispanic & Baking brands

Cereal

General Mills' cereal brands have experienced stagnation over the last several years. The company plans to increase cereal revenue by renovating older cereal brands (Cinnamon Toast Crunch, Trix) and innovating within the cereal industry. Two cereal innovations that are driving sales are protein cereals, and gluten free cereals. General Mills has had success with past cereal brand renovations. In 2010, Chex was rebranded as 'gluten free'. Since that time, sale of Chex in the US have grown at 10% annually. The company's renewed focus on cereal should help the company gain market share and increase cereal revenue.

Click to enlarge
Source: General Mills 4th Quarter Presentation, slide 26

Yogurt

General Mills' Yoplait yogurt finished fiscal 2014 on a strong note. May 2014 sales were up 10% versus May 2013 sales. The company's share of the Greek yogurt market has stabilized at around 10% on strength from Yoplait Greek. General Mills plans to build on its yogurt momentum with a 'taste test' campaign similar to the old Pepsi vs Coca-Cola taste tests. In the campaign, consumers are asked to taste Chobani yogurt and Yoplait Greek without knowing which is which.

Better-for-You Snacking, Hispanic Brand, & Baking Brands

Consumers are trending toward preferring healthier options. General Mills' better for you snacking options are meeting customer demand in this category. The company's healthy brands include Fiber One, Nature Valley, LARA Bar, and Food Should Taste Good. General Mills is aiming to continue growth in better-for-you snacking with new product innovations such as LARA Bar Granola (gluten free, non GMO), and LARA Bar ALT protein bars.

The company's Pillsbury brand has continued to do well. The Immaculate healthy baking alternative brand provides an alternative to Pillsbury for the health conscious consumer. Finally, Hispanic brands are posting positive growth due to favorable population demographic trends in the US.

Shareholder Return

General Mills has grown its dividends per share at 13% per year over the last 5 years, while simultaneously reducing share count.

Click to enlarge
Source: General Mills 4th Quarter Presentation

Shareholders of General Mills can expect a CAGR of between 7% and 12% going forward from dividends (3%), share repurchases (2% to 3%), organic revenue growth (2% to 3%), and operating margin improvements (0% to 3%).

Valuation

General Mills currently trades at a P/E ratio of 18.55, slightly below the S&P 500's P/E ratio of 19.56. The company compares favorably to its peers based on P/E ratio. The median P/E ratio for General Mills' competitors below is 23.86.

Ticker

Company

P/E

GIS

General Mills, Inc.

18.55

SAFM

Sanderson Farms, Inc.

11.35

K

Kellogg Company

12.42

KRFT

Kraft Foods Group, Inc.

12.87

CAG

ConAgra Foods, Inc.

15.68

SJM

The J. M. Smucker Company

19.57

CPB

Campbell Soup Co.

21.44

LANC

Lancaster Colony Corporation

23.86

MKC

McCormick & Co. Inc.

24.18

CALM

Cal-Maine Foods, Inc.

24.25

HSY

Hershey Co.

26.48

MDLZ

Mondelez International, Inc.

35.19

PF

Pinnacle Foods Inc.

36.58

BNNY

Annie's, Inc.

38.42

WWAV

The WhiteWave Foods Company

53.00

Median

23.86

Click to enlarge

Source: Finviz

Consecutive Years of Dividend Increases

General Mills has one of the most impressive streaks of dividend payments of any publicly traded business. The company has paid dividends for 114 consecutive years without a reduction. 11+ decades of success shows that General Mills operates with a competitive advantage in an extremely slow changing industry. As long as people need food and respond to marketing, General Mills is likely to continue paying dividends.

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

Dividend Yield

General Mills has a current dividend yield of 3.14%. The company has the 30th highest dividend yield out of 120 businesses with 25+ years of dividend payments without a reduction.

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

Payout Ratio

General Mills has a payout ratio of 53.40%, which is the 83rd lowest out of 120 stocks with 25+ years of dividend payments without a reduction. The company's payout ratio gives it some room to raise dividends faster than overall company growth, but not much.

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

Long-Term Growth Rate

General Mills has managed to compound revenue per share at 6.84% over the last decade. The company has the 31st fastest revenue per share growth out of 120 businesses with 25+ years of dividend payments without a reduction.

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

Long-Term Volatility

General Mills' long-term standard deviation of just 17.02% is the 3rd lowest of 120 stocks with 25+ years of dividend payments without a reduction. The company's extremely low standard deviation is evidence of stable, predictable cash flows and little risk of business failure.

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

General Mills' disappointing 4th quarter results mask the company's solid future growth potential. General Mills' 114 years of dividend payments without a reduction show the company can survive under a wide array of economic climates and through changing consumer tastes. General Mills is the 5th highest raked stock and a buy based on the 8 Rules of Dividend Investing.

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.