General Mills (GIS) has a good portfolio of products that its consumers love and it keeps introducing new products, from time to time, thereby giving its customer innovative and tasty food. This article is intended to explore whether GIS's stock has anything profitable to offer investors.
Stable Business
GIS is a classic example of a stable consumer resistant business that is untouched by the downturn in the economic cycle. The financials in the following exhibit show a solid performance over an economic cycle that gave one of the worst economic downturns after the recession. If we look at the revenues over the years (given at the top of the exhibit) from 2004 to date, we find that revenue growth slowed down during the difficult years but there was not a single year when the growth was negative. Revenue grew at a CAGR of around 5%.
This consistency and stability is not only the result of the nature of General Mills' products but also the result of GIS's successful management of its product portfolio through innovation, its overall successful acquisitions, and joint ventures strategy that add new products and allow entry into new growth markets. The company has leading share positions in emerging cereal markets and it is continuously investing in its strong global brands. GIS is very likely to continue its top-line growth in the future.
The gross margin (given in the exhibit below) moved within a narrow range of around 35%-40% during the last ten years. Operating margins also fluctuated within a narrow range that bottomed at 15.4% and peaked at 18.6%.
Net income grew at a CAGR of around 5.3% and EPS grew at a higher CAGR of 6.9%. GIS shared its consistent earnings with shareholders in the form dividends and share repurchase. Dividends grew consistently each year over the last ten years at a CAGR of around 10%. GIS also repurchased around 14% of its issued shares that were reduced from 768 million to 660 million shares.
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If we look at the cash flow generated by GIS we see that it fluctuated but remained strong and grew at a CAGR of 9.4% from 2004 to date. Its cash flow per share increased at an even higher CAGR of over 11%. Cash flow is like circulated blood for a company and the strong cash flow of GIS over past decade is an indication of its strong financial health.
GIS vs. The Industry
It is amazing to see that GIS has consistently paid out dividends in the past 115 years without any interruption or reduction. The company intends to increase dividends by 15% in 2014.
General Mills' dividend yield and dividend growth are much better than the industry as shown in the exhibit below. Value investors love higher dividend yields that are paid out consistently. The current dividend yield of the company is 3.09% compared to the 2.23% yield of the industry. The five-year average dividend yield is 2.73% compared to the 1.09% yield of the industry. GIS grew dividends at a higher average rate of 4.88% compared to the industry average rate of 0.45% over the past five years.
GIS's healthy cash flows backed this growth of dividends and GIS did not have to increase its payout ratio too high to sustain its dividend growth. Its payout ratio remained within the narrow range of 40%-53% over the last decade and that allowed the company to retain profits to continue profitable investments in new products and markets. GIS is making a capital investment at an average of 4% of net sales that is helping it to sustain its constant growth.
All of General Mills' margins are superior to industry averages (as given in the exhibit below) and it is no ordinary contender. Its TTM gross margins are 35.62% compared to the 24.48% of the industry. Its five-year average gross margin of 37.46% is also well above the industry average of 20.48%. The company has a strong focus on keeping COGS under control despite fluctuating commodity prices like corn and wheat that are important ingredients of GIS's products.
Operating margins, pretax margins, and net profit margins, both TTM and five year average are higher than the industry average indicating the fact that company is running at above average efficiencies at all levels.
There is A Cost To This Stability
If we compare the return on General Mills' stock with the return of the S&P500 and NASDAQ we see that GIS has produced a return far inferior to these two indices. GIS produced an 8.36% return in the last compared to the 21% return of the S&P and 34% return of the NASDAQ. Over five years GIS produced an 87.77% return compare to the returns of around 150% of the S&P and over 200% of NASDAQ.
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Valuation
I valued GIS based on relative multiples as given in the exhibit below. The valuation gave a fair value of $53.76 and an upward potential of 8.76% on the current price. This upward potential along with stable dividend yield and growth makes GIS's stock attractive to investors that want to stay invested in a safe and long term investment.
Conclusion
GIS has great opportunities ahead. The cereal markets of the US, Canada, the UK, Ireland, Australia and New Zealand are expected to grow at a CAGR of 3% through 2018 and demand in rest of the world is expected to grow at a CAGR of 7% throughout the same period. In the last four quarters CIG international segment's net sales grew by 18%.
The growing middle class in the emerging markets will drive high growth in the coming years. Middle class households in China, India, Brazil and Indonesia are expected to almost double by 2020 from 200 million households to 384 million.
GIS's net sales grew at a CAGR of 17% in China from 2008 to 2013 in constant currency terms. Double digit net sales growth is expected in 2014.
GIS is growing its net sales at an explosive rate due to its strong brand and product portfolio. Its net sales increased from $405 million to $876 million in 2013 and it's expected to reach $1 billion in 2014.
We can see that the future has a lot in store for GIS especially in the growing emerging markets. With its stable business, GIS is a good investment for investors who wish to invest in the stable consumer package food industry.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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. (More...)
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