Published September 30th, 2015
The reason to invest in General Mills (GIS) is simple:
The stock is expected to generate market-beating total returns with extremely low stock price volatility.
This makes General Mills a favorite of The 8 Rules of Dividend Investing. Click here to see The 8 Rules of Dividend Investing.
It’s very rare for a stock to offer both market-beating total returns and low stock price volatility.
Most low volatility stocks (think utilities) offer below-average total return prospects.
Conversely, most high total return stocks require investors to tolerate above average stock price movement (think value stocks and growth stocks).
Low Volatility & Low Risk
The claim that General Mills has low stock price volatility is uncontroversial. Click here to see why low volatility matters.
Over the last decade, General Mills has an annualized stock price standard deviation of 17.0%.
There are only 3 large cap stocks with 25 or more years of dividend payments without a reduction that have lower stock price volatility. They are listed below:
- Southern Company (SO) – stock price standard deviation of 16.8%
- Consolidated Edison (ED) – stock price standard deviation of 16.7%
- Johnson & Johnson (JNJ) – stock price standard deviation of 16.2%
All 3 of these stocks are extremely stable. General Mills stock price volatility is in the same league of high quality dividend paying utility businesses.
In addition, the company has one of (if not the most) impressive dividend histories of any stock.
General Mills has paid steady or increasing dividends for 115 years.
General Mills has been so stable and successful for so long because it operates in a glacially-slow-moving industry.
Packaged and branded food products simply don’t change often. That’s because people will always need to eat (quite a bold statement!).
It is true that the popularity of particular foods wax and wane over time. Cereal, as an example, has slowly lost momentum over the last several years.
These trends can help or hurt General Mills in the short run.
The company’s size and diversification within the packaged food industry makes General Mills continued success very likely over the long run.
The company has another intriguing characteristic that adds to its safety. General Mills is highly resistant to recessions.
General Mills is one of the few businesses to grow earnings-per-share each year through the Great Recession of 2007 to 2009.
To put it plainly, people keep eating the same amount (or more) of packaged food products when recessions occur.
General Mills is one of the safest businesses in which to invest from a qualitative perspective. This is reflected quantitatively in the company’s low stock price standard deviation and very long dividend history.
Market Beating Returns
General Mills stock is expected to outperform the market over a long period of time. The company is targeting double-digit total returns.
The image below from the company’s most recent investor presentation shows where General Mills’ total returns will come from:
You can see from the image above that the company expects to grow revenue in the low single digits; between 1% and 3% per year.
Operating income is expected to grow in the mid single digits; between 4% and 6% a year. This means the company is expecting margin improvements of around 3 percentage points a year.
Adjusted diluted earnings-per-share are expected to grow in the high single digits; between 7% and 9% a year. For net profits to grow faster than operating profits, either the company will have to reduce its tax rate (less likely), or engage in share repurchases (much more likely). Based on its growth algorithm above, General Mills is planning on repurchasing approximately 3% of its shares outstanding a year.
In addition to this earnings-per-share growth, General Mills’ stock currently has a 3.2% dividend yield for an expected total return of 10% to 12% a year.
Long-term double-digit total returns are not an aberration for General Mills… They are the norm.
The company has averaged 11% total returns a year from 1995 to 2015. For comparison, the S&P 500 has generated total returns of 9% a year over the same time frame.
General Mills is increasing margins through cost saving measures. Specifically, the company has 3 margin improvement projects:
- Project Century: Improve North American supply chain
- Project Catalyst: Eliminate 800 positions in the United States
- Project Compass: Eliminate ~700 positions internationally
While eliminating positions (firing employees) is not popular, it will help reduce General Mills’ expenses and increase margins – which will drive better total returns for shareholders.
Valuation & Final Thoughts
General Mills is currently trading for an adjusted price-to-earnings ratio of 18.5. The company appears slightly undervalued at current prices based on its double-digit total return potential and extremely low stock price volatility.
Prior to 2011, General Mills regularly traded for a dividend yield under 3%. The company is currently trading at a dividend yield of 3.2%. Again, General Mills looks slightly undervalued given its current dividend yield compared to its historical average dividend yield.
Going forward General Mills shareholders can expect more of the same – above average total returns with below average volatility.
The combination of low volatility, solid total returns, reasonable valuation, and shareholder friendly management make General Mills a favorite of The 8 Rules of Dividend Investing.