General Mills (NYSE:GIS) reported its fiscal Q2 results today, which were overall in line with market's expectations and hence they were received better than those of the previous quarters. In my previous article, just after the Q1 earnings release, I had predicted that the company would soon lower its guidance, which indeed occurred a few weeks ago. In this article, I would like to mention the similarities of General Mills to another stalwart, Coca-Cola (NYSE:KO), as the two companies have started to exhibit many common points lately.
First of all, while the two stalwarts have grown exceptionally for decades, they have both stumbled during the last 2 years. Moreover, their growth trajectory has not only stumbled in the domestic market but also in their international segment, which is quite disappointing for their shareholders, as the emerging markets provide great growth opportunities for most companies. Unfortunately, both companies seem to have reached a saturation point at the moment, in both the domestic and the international market.
Amid lack of growth projects, the managements of the two companies have initiated wide restructuring programs in order to reduce their costs of goods and their operating costs. Coca-Cola recorded restructuring charges of $259 M during the first 9 months of 2014, while General Mills recorded restructuring charges of $215 M during the last quarter. The restructuring project of Coca-Cola extends till 2019 to save a total of $3 B per year while the project of General Mills extends till 2017 to save more than $350 M per year.
While the cost-cutting initiatives have nothing wrong embedded in them, they indicate that the managements of the two companies cannot find significant growth opportunities and hence these initiatives are not a positive signal for the shareholders. In the meantime, the earnings of both companies are significantly hurt by the restructuring expenses, with General Mills' H1-2015 earnings down 30% vs. last year and Coca-Cola's 9M earnings down 8% vs. last year. Of course the managements of both companies ignore the effect of the restructuring programs and refer to the adjusted earnings but expenses that show up regularly in the results cease to constitute special items.
Another common theme of both stalwarts are the pronounced share repurchases, which somewhat mask the business deterioration and make the earnings per share (NYSEARCA:EPS) show a smaller decline than the net earnings. Unfortunately, both managements distribute a much higher amount to their shareholders in the form of dividends and buybacks than the earnings, thus raising the debt of their companies. For instance, General Mills returned $1.5 B to its shareholders during the first half of 2015 even though it earned only $0.7 B. Similarly, Coca-Cola distributed $7 B to its shareholders during 9M-2014 even though it earned $6.3 B and it invested $6.5B. In this way, both managements try to mask their deteriorating results by adding debt, which will burden the companies only in the long run and hence the managements do not seem to care about it.
The worst part of the aggressive share repurchases is that the managements occasionally use most of them as a bonus to themselves, thus further hurting their shareholders. To be sure, General Mills spent $1 B in share repurchases during 2013 but its share count remained constant, which means that half of that year's earnings was returned to the management as a bonus. Fortunately, in the first half of 2015, the company reduced its share count by 3% with the use of $1 B share buybacks. In a similar way, in the first 9 months of 2014, Coca-Cola spent half of its earnings ($3 B) in share repurchases but used the 1/3 of them to reward its management and hence the share count was reduced by only 1.5%.
To sum up, both stalwarts have stopped growing in the last 2 years and consequently their managements have resorted to financial engineering and extreme returns to their shareholders to mask the problem while reducing the future prospects of both companies. To be fair, it is very hard to grow after having expanded almost everywhere but both companies have excellent records of innovation and hence their managements should do their best to maintain that record. I find it unacceptable that both managements reward excessively themselves against their shareholders and I believe they will not be able to keep hiding behind the "adjusted earnings" for many more years.
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.