The first thing that comes to mind when I hear the name General Mills (New York Stock Exchange: GIS) is their wonderful selection of cereals. That was something that was a big part of my childhood upbringing so naturally that I want to like the company. However, I will put aside my own bias and analyze the health of GIS through an analytical lens. The price is down from the high of $90.89 per share and the dividend yield is approximately 3.7%. We can see that over the last decade, the total return of GIS compared to the S&P 500 (TO SPY) has been mediocre, so I’m wondering if the company deserves a spot in my portfolio.
As a quick summary, General Mills is a global manufacturer and marketer of consumer foods. It operates in various segments such as such as North American, international, pet and food service retailers. The company offers a wide range of products including cereals, yogurt, soups, meal kits, pet foods and more. General Mills sells its products through several channels, including supermarkets, e-commerce retailers, and specialty pet stores.
Risk: losing sales to the store brand
GIS had a decent second quarter, with EPS hitting $1.25, beating expectations by $0.09. However, the company’s revenue during the quarter amounted to $5.1 billion, down 2% from a year earlier. The decrease in revenue was primarily due to lower sales volume. I think there are many factors that contribute to this. One of them is rising grocery prices, which are causing people to gravitate toward “store brands” rather than the brands under the SIG umbrella. Tons of layoffs, higher inflation, higher housing costs and record levels of debt are causing people to tighten their budgets a little more.
As we can see, private label sales growth has grown in several categories. In fact, almost half of American shoppers prefer to buy private labels. 37% still prefer national brands like General Mills, but two-thirds of this group still said they are open to buying private brands. In my own personal experience, my family and I have opted for the store brand more often than not when shopping, as it is generally more affordable to do so and the products are usually fairly similar quality.
After all, food prices are expected to continue rising throughout 2024. Food prices increased by an average of 2.7% between December 2022 and December 2023. Since the price of food will continue to increase, I expect store brands to continue gaining market share throughout the year. year.
For the remainder of 2024, GIS adjusted its net sales outlook, which is now expected to remain flat or decline 1%. This adjustment reflects a slower-than-expected recovery in sales volume and, as mentioned above, I believe a major factor is the shift toward private brands that consumers are choosing.
Adjusted operating profit and diluted earnings per share are now expected to rise between 4% and 5%. This revision is attributed to the impact of slower organic sales growth, offset by higher cost savings. For reference, revenue growth has matched this outlook over the past five-year period at an average of 4.88% annually. Management still maintains its expectation that free cash flow conversion will be at least 95% of adjusted earnings after taxes. In a sign of confidence, GIS bought back about 18.8 million shares, worth $1.3 billion during the first six months of its fiscal 2024 year.
To compensate for lower sales, prices will likely continue to rise. However, you can’t keep this cycle going forever, as eventually customers will likely go elsewhere, such as private labels. It’s difficult from a consumer point of view, as inflation and higher prices cause changes in spending habits and the internal GIS side. Management anticipates that input cost inflation will remain around 5% of the total cost of goods sold. This inflation is mainly due to the increase in labor costs that affect supply, manufacturing and logistics expenses.
Finally, the company aims to achieve “holistic margin management” cost savings equal to approximately 5% of the cost of goods sold in fiscal 2024. This target has been raised from the previous expectation of 4%. To help offset lower sales, they are focusing on managing costs in various aspects of the business, including procurement, production and distribution. I think it’s good coverage by management, but it still doesn’t address the sales issue. It will be interesting to see how this develops in the coming quarters.
As of the last declared dividend of $0.59 per share, the current dividend yield is approximately 3.7%. The dividend was previously increased by 9.3% in June 2023. With a healthy payout ratio of 51%, I expect management to announce another increase by the middle of this year. For reference, the industry median payout ratio is approximately 50%, so GIS falls within the same range.
Fun fact: General Mills has been paying dividends since 1898. While this is incredible in itself, I still don’t think the dividend has grown at a fast enough rate. Over a 10-year period, the dividend grew at a CAGR (compounded annual growth rate) of 4.62%. In a shorter time period of three years, the dividend only grew at a CAGR of 4.92%. For a stock yielding less than 4%, you would ideally want to see a higher level of growth.
Therefore, I don’t think GIS belongs in my personal portfolio or any dividend growth portfolio. The lack of dividend growth means there are many better options out there if you’re looking for quality dividend growth companies. However, I understand taking a position at GIS if you are looking for a reputable company that has an amazing track record of consistency with paying shareholders. If reliable income is all you are looking for, then GIS should not disappoint you.
According to management during the last earnings call, the earnings per share forecast is between 4% and 5%. The full-year EPS estimate for 2024 is about 4.48 times. When you enter these two into a DCF calculation, we can determine a rough estimate of the fair value of GIS stock. As you can see, we can arrive at a fair value estimate of $77.65 per share. This would represent a potential increase of around 20% from the current price level.
Wall St.’s average price target is $68.63, representing a modest 5.86% upside. The highest price target is $82.20 per share and the lowest is $58 per share, so our estimate falls within the high end of this range, assuming they can meet this EPS growth estimate of 4%. Combine this upside potential with the current dividend yield of 3.7% and you have solid future returns.
Furthermore, the current P/E is 14.34x while the 5-year average P/E is 17.01x. This may further reinforce the fact that the stock is currently discounted. However, this fair value estimate assumes that consumer spending on branded items improves and that management can meet expected growth projections. If they don’t, you could see GIS stock trading sideways or even lower if sales don’t improve dramatically in the upcoming earnings reports.
I have a bit of a mixed perspective here. I think GIS is a solid company, but so far the poor performance relative to the SPY and lackluster dividend growth make it really hard to recommend. However, when you compare the performance of GIS with that of its peers, it can be seen that it outperforms most of its peers. So if you want some exposure to this sector, GIS is a solid option.
In conclusion, General Mills may not be the best stock to own right now due to the overall shape of the market with high inflation, consumer spending habits toward private brands, and declining sales. While the company has a strong legacy and diverse consumer foods portfolio, recent performance, such as lackluster dividend growth, raises concerns about its appeal to investors looking to earn a strong total return and raise sustainable cash flow. of growing dividend income.
Despite management’s efforts to offset lower sales through cost-saving measures and share buybacks, uncertainties still exist regarding its ability to sustainably improve sales and profitability. While GIS remains a reputable company with a track record of consistency, I think the money is better suited elsewhere.