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General Mills: 10% Annual Return Potential & Low Volatility

Published December 20th, 2016 by Bob Ciura

Stocks that allow their investors to sleep well at night can be few and far between. But if there is such a thing as a sleep-well-at-night stock, General Mills (GIS) is probably as close as you’ll get.

Investing in General Mills stock is a simple proposition. It sells a variety of food products that are consumed each day by millions of people, regardless of the economic climate.

Thanks to its amazing stability, General Mills has paid uninterrupted dividends for 117 years.

And, General Mills is a Dividend Achiever. The Dividend Achievers are a select group of stocks with 10+ consecutive years of dividend increases.

You can see the entire list of all 273 Dividend Achievers here.

General Mills isn’t the most exciting stock pick. But investors interested in 10% annual return potential, with low volatility, should find a lot to like about General Mills.

The stock has a tasty 3% current dividend yield. Plus, it is likely to grow future earnings-per-share at a high enough rate to continue raising its dividend each year.

Business Overview

General Mills started out 150 years ago, as a single flour mill built in 1866 on the banks of the Mississippi River in Minneapolis, Minnesota.

Today, General Mills is a giant food and beverage company. In all, General Mills produces more than 100 brands, which it sells in more than 100 countries around the world.

GIS Brands

Source: Company website

The company operates in three core segments:

Business conditions are more challenging than usual for General Mills. The company is seeing slowing sales across some of its biggest categories, such as cereal and canned soup. Overall, revenue declined 6% in fiscal 2016.

To be sure, foreign exchange is the biggest reason for General Mills’ sales decline. Excluding the effects of currency translations and non-recurring expenses, earnings per share decreased 2% in fiscal 2016.

Still, the company is not growing at rates investors are accustomed to. That is why management is re-positioning the company to growth from new product lines.

General Mills’ future growth will be fueled by its investments in several growth categories, primarily natural foods.

Growth Prospects

General Mills management is re-focusing investment toward the brands that offer the highest future growth potential.

GIS Portfolio Segmentation

Source: Barclays 2016 Consumer Staples Conference, page 8

Consumers, particularly in developed markets like the U.S. and Europe, are demanding fresher foods with better ingredients. Large packaged foods companies like General Mills risk missing out on the organics boom.

This is why General Mills bought Annie’s for $820 million. It has grown at a high rate in recent years, and is expected to continue to do so moving forward.

GIS Annie's

Source: Barclays 2016 Consumer Staples Conference, page 28

Annie’s significantly boosts the company’s existing organic brands.

GIS Natural Brands

Source: Barclays 2016 Consumer Staples Conference, page 36

By fiscal 2019, General Mills projects its natural and organics brands will generate $1 billion in annual sales. This is why management considers three-quarters of its brands to be in growth categories.

In addition to growth from acquisitions and new products, General Mills is aggressively cutting costs.

GIS Profit Margins

Source: Third Quarter Earnings presentation, page 17

This should be a further tailwind for earnings-per-share growth.

Lastly, General Mills should generate strong growth from new geographic markets. In fiscal 2016, the company saw broad-based growth across its international markets:

Overall, total international sales increased 3% after excluding currency effects in fiscal 2016. This should be a long-lasting growth catalyst.

General Mills should benefit from the emerging markets, which have with high rates of economic growth and expanding middle classes. For example, the company’s sales in India grew by double-digits in fiscal 2016.

Competitive Advantages & Recession Performance

The most important competitive advantage for a consumer goods company is its brand image. General Mills has built a leadership position across its brand portfolio, which leads to pricing power and reliable growth.

One advantage for General Mills is that, because of its size and financial strength, it can afford to spend significantly on advertising. Advertising helps the company maintains a positive brand image with consumers.

Advertising expense over the past few years is as follows:

This has allowed General Mills to dominate its operating categories. Its seven largest brands—Cheerios, Betty Crocker, Pillsbury, Nature Valley, Yoplait, Old El Paso and Häagen-Dazs—each generate more than $1 billion in annual sales.

General Mills owns strong brands in an industry that is resistant to recessions.  This makes General Mills one of the best stocks to hold for recession performance. Everyone has to eat, even during recessions. The company’s earnings-per-share during the Great Recession are shown below:

Valuation & Expected Total Returns

General Mills stock trades for a price-to-earnings ratio of 23. It is slightly cheaper than the S&P 500 Index, which trades for a price-to-earnings ratio of 26.

At the same time, since 2000 the stock has held an average price-to-earnings ratio of 19.

While General Mills is cheaper than the S&P 500 average, it is more expensive than its own historical average. Therefore, the stock should be considered fairly valued.

That being said, investors can still do well in the stock. Here is the roadmap to 10% annual returns:

From a combination of revenue growth, cost cuts, share buybacks, and dividends, investors could earn 10%-11% returns each year.

Final Thoughts

There are few stocks that offer the stability that General Mills offers. The stock has double-digit return potential, with the added benefit of low volatility.

General Mills stock has a beta of just 0.60; this means that for every 1% change in the S&P 500 Index, General Mills will fluctuate 0.60%.

This is what makes General Mills a low-risk stock, relative to the rest of the stock market. When the next market downturn hits, General Mills should fare better than most, thanks to its high level of stability.  The company is truly a blue chip dividend stock.

In the world of dividend growth investing, stability is the name of the game. General Mills has more than a century of dividends under its belt. It has a dividend track record few companies can match.

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