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Summary

  • The company’s objective to accelerate revenue growth includes a strong new-product lineup and renewing many existing brands.
  • The company will streamline supply chain operations and use such cost savings to offset input cost inflation.
  • The company will continue to reward shareholders with yearly dividend increases and share buybacks while company initiatives take effect.

General Mills (NYSE:GIS) is a company that is participating in a slow growth period and engaging in cost cuts and product innovation to improve profitability in such a difficult environment. The company has a portfolio of great brands operated by highly talented managers in a dynamic corporate culture. The company has invested heavily in its cereal, snacks, yogurt, and meals businesses over the years. The company currently yields about 3.0 percent, and has a long history of yearly dividend increases. While no stock should be considered a "safe stock" without any risk, GIS shares are relatively safe in comparison to many high-profile stocks, and should be strongly considered as a building block of any long-term investors' portfolio.

Background

GIS is one of the largest U.S. producers of ready-to-eat breakfast cereals, and a leading producer of other well-known packaged consumer foods. The U.S. retail division accounted for 59 percent of net sales in the 2014 fiscal year (ending in May), and includes cereals, refrigerated yogurt, soup, dry dinners, vegetables, dough products, baking products, snacks, and organic products. The convenience stores and food service division (11 percent of 2014 fiscal year sales) includes products sold to distributors, convenience stores, restaurant operators and cafeterias. The international division accounted for 30 percent of 2014 fiscal year sales (excluding sales from unconsolidated joint ventures). Other consumer packaged food products include baking mixes (Betty Crocker, Bisquick); dry dinners; Progresso ready-to-serve soups, Green Giant canned and frozen vegetables; snacks; Pillsbury refrigerated and frozen dough products, frozen pizza; Yoplait refrigerated yogurt; Haagen-Dazs ice cream; and Cascadian Farm and Muir Glen organic products. Some products may be marketed under licensing agreements with other parties.

GIS joint ventures include a 50 percent equity interest in Cereal Partners Worldwide, a joint venture with Nestle S.A. (OTCPK:NSRGY) that manufactures and markets cereal products outside the U.S. and Canada; a 50 percent equity interest in Haagen-Dazs Japan, Inc., which manufactures, distributes and markets Haagen-Dazs ice cream products and frozen novelties; and a 51% interest in Yoplait S.A.S., acquired in 2011.

Fiscal 2014 fourth-quarter earnings

In June 2014, GIS announced that its fourth-quarter net sales declined 3 percent to $4.3 billion. Adjusted division operating profit of $733 million was about equal to the year-ago quarter results. Adjusted diluted earnings per share totaled 67 cents for the fourth quarter, up 24 percent from 54 cents a year earlier. Fourth-quarter net sales for the U.S. retail division declined 1 percent to $2.4 billion, with operating profit totaling $502 million, 3 percent below year-ago quarter results. The international division net sales totaled $1.3 billion, down 7 percent compared to last year's fourth quarter, with adjusted international division operating profit increasing 4 percent to $146 million. In the fourth quarter, convenience stores and food service net sales grew 1 percent to $508 million, with operating profit rising 14 percent to $86 million. Combined after-tax earnings from the Cereal Partners Worldwide and Haagen-Dazs Japan (HDJ) joint ventures in fiscal 2014 fell 9 percent to $90 million, reflecting higher consumer marketing investment by CPW and negative foreign currency exchange effects for HDJ. GIS repurchased approximately 36 million shares of common stock in 2014, for a total of $1.7 billion.

The CEO of GIS characterized the company's primary goal for fiscal year 2015 as follows:

"Our Number One objective in the new fiscal year is to accelerate our top line growth… Our fiscal 2015 plans include a strong new-product lineup, compelling news or renovation on many existing brands, and a full slate of consumer-focused marketing initiatives. In addition, supply chain cost-savings… are expected to exceed $400 million in 2015. We anticipate these savings will offset input cost inflation, which we estimate at 3 percent for the new year. GIS has begun a formal review of its North American manufacturing and distribution network with the goals of streamlining operations and identifying potential capacity reductions."

General Mills' fiscal 2015 net sales are expected to grow at a mid-single digit rate. Adjusted segment operating profit also is expected to grow at a mid-single digit rate. Adjusted diluted EPS is expected to grow at a high-single digit rate.

Competitors and risks

The U.S. food products industry is dominated by a small number of multinational corporations like Danone (OTCQX:DANOY), Kraft Foods (KFT), General Mills and Kellogg (NYSE:K). The entire industry is very competitive, and margins are typically so low that earning a profit becomes a challenge. The worldwide processed food industry is facing low growth rates, high-energy costs and continuously changing consumer preferences. There are a few high-growth segments, however, such as health, frozen and organic food. Taste, convenience and health continue to be the primary factors for food choices.

Increasing health concerns are impacting all sectors within the industry as obesity levels continue to rise. The industry is being adversely affected by: 1) rising prices for milk, eggs, corn, wheat, oils and other edible commodities; and 2) prices of electricity and fuel are also increasing, making processing and distribution more expensive. With underemployment, modest inflation and weak economic growth, passing on an entire price hike to consumers is not an option without substantially reducing overall demand. These pressures affecting food companies are, in part, underlying merger and acquisition activity in the industry.

Analysts' views and our views

Analysts see GIS' brand strength giving the company some protection from competition from less expensive products. The company's earnings per share growth will be constrained by continued weak domestic demand, slowing international macro-economic growth and increased marketing and merchandising investment within the yogurt business which is needed to drive sales growth. Risks to analysts' estimates for GIS shares include increased competitive pressures, disappointing consumer acceptance of new products, higher-than-expected commodity cost inflation and unfavorable foreign exchange rates. Despite a slow growth environment, however, reasons to recommend GIS' shares are its strong brands; profitability and cash flow; and long-term record of earnings and dividend growth. The shares also currently gave a dividend yield of about 3.00 percent. Consensus analyst ratings for GIS shares are "hold" with some "buys," with price targets ranging from $50 to $59 a share.

We generally agree with analysts. GIS is fighting trends that many companies in its industry are fighting, but this company has shown time and time again that it is able to adapt and thrive, despite the economic circumstances it faces. The company has a price-to-earnings ratio of about 19.3. The company's earnings estimate for the current 2015 fiscal year is $3.01, and for the 2016 fiscal year is $3.22. So, the forward price-to-earnings ratio based on 2016 fiscal year earnings is about 16.35. While an investor could buy the shares immediately for the long term, a pullback to under $50 (a price-to-earnings ratio of about 15.50 based on 2016 fiscal year earnings) before initiating a full position is recommended.

Source: General Mills: A Dividend Play Emphasizing Productivity And Product Innovation