Inflation Protected Portfolio: General Mills

| About: General Mills, (GIS)

Every portfolio designed for stability and inflation protected income should include some consumer staples like food stocks. Food prices will rise with the cost of goods sold, but it's not a linear event. Input costs tend to rise before prices can be passed on to consumers. Good management and scale are needed to wade through the markets.

I like General Mills (NYSE:GIS) for my food segment. While there are others in there too, let's focus for now on General Mills (Data is sourced from Morningstar).

General Mills' 10-Year Financials:

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We're not going to use rocket science here. For the most part, the numbers on the left side of the chart are much smaller than the numbers and the right side of this chart. That has my attention (and my money). Most important is the growth without share dilution and the steady margins. I also want to know if this has been debt financed and what the debt effect is for a company.

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I see the debt bouncing around, but trending down. Without shareholder dilution that signals cash expansion in my mind, and with a consistently rising EPS, the effect of the debt is positive.

Fitch had the debt rating at BBB+, and I'm good with that. Just to quantify that rating, GIS issued a bond set at the end of 2011 for 10 years at 3.15%. General Mills has done well with dividend growth of 8%, 11%, and 16% for the last three years, respectively, easily exceeding the inflation rates. The long-term historical dividend growth is good as well.

It's the future that is important to inflation protection. General Mills recently acquired Yoki, a Brazilian food company. This is expected to add almost 25% more to the international sales and to double the sales in Latin America. Brazil is a strong and growing market, rich in natural resources, and is semi-stable and a good place to grow. I'm a great fan of improving and expanding existing brands for international growth in the food market. Also, long-term health trends are working in the U.S. and General Mills is moving that way with acquisitions as well.

I don't need to see much more before I start adding General Mills on price dips. I expect further dividend increases to keep the payout ratio around 50%, as they add to earnings. Volatility in the food market could affect a quarter or two here and there. GIS has a 10-year average EPS growth rate of 9%, it is able to finance that rate growth with debt at 3.15% with no share dilution, and is moving into dynamic growth areas.

General Mills' 5-year price chart:

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I'm adding General Mills below $40 per share; I would love to see the mid-thirties again and I bet many investors would as well.

With a yield of 3.2% and growing, General Mills is a good way to fill this sector allocation. Higher yields are needed for those seeking immediate income, but those higher yields need to be mixed with rising yields in a defensive sector. General Mills pairs well with a good utility stock and side-dish of MLPs.

Disclosure: I am long GIS.