General Mills: An Isolated Winner 'Among Virus Carnage'
Summary
- GIS is a safe haven for income investors in the virus recession bear market.
- Over 120 years of uninterrupted dividends couple with conservative payout ratios and cash flows easily covering dividends and capex to make this a core portfolio target.
- A 12.98% yield rate, along with 12.98% downside market protection, can carry you through the next 2+ months of virus economy, providing immediate cash income.
- Looking for a helping hand in the market? Members of Engineered Income Investing get exclusive ideas and guidance to navigate any climate. Get started today »
An Engineered Income Investing Top Idea.
A feast draws your attention, sating your appetite and fueling a warmth to your very core. Fuel for your core portfolio is what we are focusing on during this virus recession. General Mills (NYSE:GIS) is a Dividend Zombie that belongs in the core of any income portfolio.
Company: General Mills
Current Price: $58.97
Dividend: $1.96 (3.32%) Ex-Div ~7/8/20
Fair Value:
FV: YDP $54.90
FV: P/E $60.20
FV: P/S $47.20
Brief Discussion
General Mills earns a top place in the core of income portfolios for its quality as a Dividend Zombie with 120 years of uninterrupted and uncut dividend distributions, a recession-resistant consumer defensive packaged foods segment member, global brand powerhouse, and best of breed. All of these qualities make it qualify as a SWAN (sleep well at night) core target.
The price history chart confirms this thesis, with shares having immediately bounced back from the initial momentum-driven virus economy plunge to a new high above the pre-bear level already. The packaged food - consumer defensive industry segment is stable through economic cycles. This is exactly the property an income investor seeks.
Dividend Review
Dividends are judged by their reliable history, safety, and yield.
Reliable history demonstrates a company's commitment to the dividend. Track records of reliable dividends for 25, 50, and even the rare 100 years of unbroken distributions do not come by accident. Only planning, with proven execution and financial depth to back it up, and a dedication as a key core company value will provide results that create such historical track records. General Mills is a giant among these, with over 120 years of uninterrupted dividends.
A steady and sustainable trend of dividends is the first metric of dividend safety. General Mills' cash payout ratio below 50%, with a steady long-term trend, marks it as a very safe dividend.
Cash flows demonstrating the ability to pay the dividend without net borrowing is the mark of a safe dividend. A long-term historical trend of this steady ability provides the canary in the coal mine early warning if danger to the dividend may be lurking ahead. GIS scores well on these metrics.
Be wary of companies that rely on accretive rather than organic growth to sustain their momentum. Steady or growing revenues and cash flows can look comforting at first glance but may hide shareholder dilution that can reveal sagging per-share numbers. GIS shareholder metrics confirm its safety and performance are real. Free cash flow per share is steady, and FFO (funds from operations) is growing. Both these metrics provide strong favorable payout ratios on the steady dividend with room for growth.
Fair Value Analysis & Appraisal
Even the best of companies may be at bargain or bubble prices at any given time. Value is what determines when to enter, hold, and exit for a successful investor.
YDP fair value is $54.90 for the current $1.96 in annual dividend distributions at the 3.35% average historical yield rate. Other historically well-correlated traditional financial metric ratios include P/E fair value at 60.20 and P/S at $47.20. The agreement between YDP and P/E valuations places a high confidence level to a valuation of $55.00 to $60.00 range at this time, with a preference to the more conservative $55 side.
Where To Be Wary
Clearly, this safe harbor consumer defensive dividend machine has a lot going for it in all economic cycles. However, one should always look for what may be unseen over the horizon. In this regard, the only issue I can think of that might derail (albeit only temporarily) this core target holding is possible unexpected supply chain disruptions that are unforeseen at this time.
Covered Option Writing Opportunities
GIS has all the qualities of a core holding for income investors. Its place as a consumer defensive makes this doubly so in the current volatile and uncertain virus bear market economy. However, the company shares are in a current minor price bubble (near the high end of fair value range) presently. This is as should be expected, with investment dollars currently fleeing to safe havens. Let's look at an EII strategy to generate strong superior double-digit income yield with downside market protection at this time.
Consider writing the 71-day cash secured puts for 7/17/20 $52.50 @ $1.28 premium. This provides a 12.85% annualized yield rate on net covering cash of $51.22. The breakeven is $7.64 (12.98%) below current market. The $51.22 is a strong bargain entry point relative to the $55-60 fair value if shares are presented.
Closing Thoughts
Numbers like these in a hostile market with deep downside protection, coupled with excellent locked in double-digit annualized yield rates, are a rare find indeed.
Thank you for taking the time to read my work. If you are interested in dividends, retirement income, option boosting yields, and fundamental value analysis and appraisal, consider becoming a follower by clicking the orange "Follow" button. I invite you to join in the comment section below to join a discussion of the ideas presented in this article.
Stay safe and well.
I am not a licensed securities dealer or advisor. The views here are solely my own and should not be considered or used for investment advice. As always, individuals should determine the suitability for their own situation and perform their own due diligence before making any investment.
Stay safe and well.
Richard
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This article was written by
Analyst’s Disclosure: I am/we are long GIS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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