TipRanks Smart Dividend Newsletter #43: Sweet Income
Hello and welcome to the 43rd edition of TipRanks’ weekly Newsletter providing you with investment ideas for safe-bet quality stocks that are outstanding dividend payers, compared to their peers.
This Week’s Quality Income Stock Idea
General Mills, Inc. (GIS) is a leading global manufacturer of packaged food products, which it sells through retail stores as well as to food service and commercial baking industries. GIS’s brands, such as Cheerios, Häagen-Dazs, Lucky Charms, Nature Valley, Pillsbury, Yoplait, and many more, are known and loved around the world. It is headquartered in Minneapolis, Minnesota.
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Company Overview
Founded in 1866 as a flour mill on the banks of the Mississippi River, the company quickly distinguished itself for its commitment to the safety and quality of its products. Officially incorporated as “General Mills” in 1928, GIS has continuously increased its product suite by developing its own products, purchasing licenses, and pursuing strategic acquisitions.
General Mills’ international expansion began in 1989 by forming a partnership with the Swiss food products giant Nestle and offering its products in Europe. The company has since ventured into other markets, and today GIS commands over 100 brands in more than 100 countries globally. With a market cap of $38 billion and annual revenues of $20 billion, GIS ranks #219 in the Fortune 500 list of the largest U.S. companies.
In 2023, GIS was named by Fortune as America’s most innovative food production company. General Mills’ innovations extend far beyond creating new food products and flavors. The company’s experts worked with NASA to develop a food safety system, which was adopted by the U.S. Food and Drug Administration in the 1970s and has since become the industry standard. In addition, the company established the General Mills Foundation, which provides grants to organizations and individuals working in the fields of hunger relief, nutrition, education, and sustainable agricultural activities.
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Business Overview
The company operates through four business segments: North America Retail, International, Pet, and North America Foodservice. The North America Retail is the source of 63% of total net sales and 78% of operating profits and is responsible for the sale and distribution of GIS’ proprietary products to various types of stores, food and drug chains, and e-commerce grocery providers.
The International segment is responsible for 14% of total net sales and 4% of operating profits. It controls retail and food service businesses outside of the United States and Canada. The Pet food division works primarily in the United States and Canada and is responsible for 12% of total net sales and 11% of operating profits. The North America Foodservice, which is responsible for 11% of total net sales and 7% of operating profits, supplies mostly white-labeled products.
General Mills’ diverse portfolio of well-known packaged food brands, coupled with its stellar delivery on business strategy centered on creating competitive advantages, has helped the company to reach top-tier market share positions within its core categories.
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Dividend Analysis
General Mills has paid dividends without interruption since 1898, making it one of just 26 U.S. corporations that have consistently distributed dividends for over a century. Such a long dividend track record speaks volumes about the company’s dividend reliability.
The company’s current dividend yield is 3.5%, twice the average for the Consumer Staples sector. The company’s stated policy includes cash return to shareholders of 80% to 90% of free cash flow, including an attractive dividend yield. GIS has raised its dividends in each of the past three years, making up a dividend-per-share CAGR of 4.5%. Analysts expect that GIS will continue increasing its payouts by an average of 4-5% p.a. for years to come.
The safety of the dividend is supported by the company’s reasonable EPS-based payout ratio of 52% and cash payout ratio of 58%, which leaves the company with ample capital and cash to pursue other capital allocations.
According to Moody’s, the fact that GIS doesn’t insist on annual dividend increases in all circumstances is a sign of “prudent financial policy.” Thus, following a leveraged buyout of Blue Buffalo Pet Products in 2018, the dollar amount of dividend-per-share remained unchanged until the company reduced its leverage to the per-acquisition levels.
This prudent financial management supports the company’s robust financial health. Although it has a high amount of leverage, its debt is well-covered by operating cash flow, while interest payments are covered by EBIT many times over. GIS closely manages its debt obligations: thus, in January it issued new unsecured debt obligations for $500 million, which are used to repay medium-term debt of the same amount to term out debt and improve liquidity.
General Mills’ profitability metrics such as ROA, ROE, and ROIC, are in the top percentiles for its industry. At the same time, its gross, operating, and net margins are much higher than average among its peers in the industry. In addition, the company generates ample cash from its operations, ending fiscal 2023 with a free cash flow of over $2 billion.
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Total Return Outlook
During a large part of the past two years, GIS faced pressures on its operating margins due to higher input costs and subsequent price increases, which led to a slight decline in sales volumes. Despite these headwinds, the company exceeded analysts’ estimates in nine out of ten recent quarters.
GIS’s fiscal Q2 2024 report (for the quarter ended December 20, 2023) featured a strong beat on EPS, which rose by 14% year-over-year. Although the management said that General Mills saw slower-than-expected volume recovery amid a continued challenging consumer landscape, it generated bottom-line growth thanks primarily to higher operating profit and meaningful cost savings following its margin management approach.
In the past three years, GIS shares rose by 14%, after accounting for a strong decline in the mid-part of last year on the back of the difficult consumer environment and general market conditions that penalized consumer-staple stocks. In the past year, the stock declined by 16%, as it was further pressed down by the downward update to guidance. While in the short term, the stock is expected to continue sideways, analysts expect it to recover further down the road as the economy improves and sales volumes resume growth.
The stock performance is also expected to be supported by the company’s share repurchases, which are an integral part of its capital allocation strategy. In the first half of FY 2024, the company bought back shares for $1.3 billion. Given the share-price reduction, the management increased the full-year buyback target to 3% of shares outstanding.
Meanwhile, the stock’s declines make for a great entry point for value-conscious investors. GIS is trading at ~20% to the Consumer Staples sector and at the mid-range of the valuations for its peers in the industry. In addition, General Mills trades about 45% below its fair value, based on future estimated cash flows. These factors position the stock within the value universe.
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Investing Takeaway
General Mills is a stable, profitable, and well-managed company with a long track record of outstanding delivery. With leading positions in its core markets, continuous innovation, and a constantly growing global presence, GIS is one of the best-positioned companies in the Consumer Staples sector, expected to continue its responsible expansion and grow its market share. With its exceptionally long track record of dividend payments and stated policy of sharing profits with its shareholders, we believe it is well-suited to be a part of long-term income portfolios.
Click here for more stock market analysis from TipRanks Macro & Markets research analyst Yulia Vaiman
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Disclaimer
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