General Mills: When Boring Is Beautiful

Kyle is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The phrase "May you live in interesting times" is reputed to be one of the three principle Chinese curses heaped upon an enemy (The other two are: "May you come to the attention of powerful people" and, more ominously, "May you get what you wish for").

After the the dot-com crash, 9/11, subprime mortgages, the Detroit bailout, TARP, the Great Recession, the Debt Ceiling fight, and the Fiscal Cliff, you've probably figured out why it's considered a curse. If you're finally ready to get off the ferris wheel, General Mills (NYSE: GIS) may be just the stock for you.

General Mills is one of the largest and most trusted processed and packaged food companies in the world. Cheerios, Betty Crocker, Pillsbury, Totino's, Nature Valley, Progresso, Yoplait, Haagen-Dazs, Green Giant, Hamburger Helper, and Old El Paso.

What sets General Mills apart from its crowd of large cap competitors like Kraft (NASDAQ: KRFT) is the company's focus on returning capital to investors. General Mills hasn't missed a payout in 113 years, making GIS a solid defensive play against souring economic conditions. The fact that their product prices rarely show any significant change is also a strength. If you invested $25,000 in General Mills ten years ago, you'd be sitting on roughly $42,300 today.

If you'd put that $25,000 in Kraft, you'd have about $29,800 (16.11%) to show for it. Yet, even this paltry sum would be a purely nominal gain. Inflation over the same period ran much higher. The USD has depreciated about 27% over the last ten years, meaning that the return on our hypothetical Kraft investment is actually negative (-11%) in inflation-adjusted terms (and that's after all your dividends were plowed back into the stock).

Hey, thanks for nothing!

Apart from the weight of history, there are a large number of factors indicating that General Mills will continue to pay its dividends. General Mills has been sharing its success with its shareholders and offers a decent dividend yield of 3.3%. It has an annualized dividend rate of $1.32 per share. Dividends have increased steadily over the years, as shown in the graph below.

GIS Dividend History (10/95 – 10/12) 

<img src="/media/images/user_13882/servletcharts_large.gif" />

General Mills' international sales increased 28%, including the acquired Liberté yogurt business. Sales for the region combining Europe, Australia and New Zealand increased 51%. This top line performance reflects the addition of Yoplait International and good gains by Nature Valley in the U.K., Häagen-Dazs in France and Old El Paso in Australia. Sales in the Asia-Pacific region increased 20%, led by China. In the Latin America region, constant currency sales increased 20%.

Net sales for General Mills' Snacks division (Grain, Fruit and Savory) have grown at an 8% compound rate over the past three years and 15% in 2012 ($1.6 billion). Grain snack bars – a category General Mills created back in 1975 with the launch of Nature Valley Granola Bars – is currently the company's fastest growing business, generating $3 billion in retail sales annually.

However, the outperformance of the company's Snacks division all but been canceled out by the high cost of grains (higher operating expenses) and high debt levels due to the acquisition of Yoplait.

Until last year, General Mills was a big player in the yogurt sector. All that was supposed to change with the July, 2011 acquisition of Yoplait. Unfortunately, General Mill's timing couldn't have been worse, as consumers began to abandon low-fat Yoplait for thicker, richer Greek yogurt. Indeed, consumers switched categories before the ink on General Mills' Form 8-K was dry. Since 2009, Greek yogurt sales have grown by an astonishing 800%, mostly at the expense of traditional low-fat yogurts (like Yoplait).

 

<img src="/media/images/user_13882/yogurtsales_large.PNG" />

(Source: UBS)

Had everything gone according to plan, the $1.2 billion to acquire a 51% controlling share of the Yoplait S.A.S. franchise from PAI Partners and French diary cooperative Sodiaal would have been a once-in-a-decade victory for the cereal giant instead of a wash.

It's an inconvenient truth that while consumer tastes change constantly, they rarely revert back to status quo ante. That's because despite all the diet fads you hear about on the news, food isn't fashion. The old doesn't become new again every 20 years, it just stays old. Put it this way: You might have dusted off your old bell-bottoms during the Second Summer of Love in 1988, but when is the last time you drank a glass of Tang or had a Zima to drink over lunch?

All of which makes General Mills' tiny share of the Greek yogurt market disconcerting, at best. Even with 85% growth quarter-over-quarter, General Mills' cut is still only 7% of the total pie. At a growth rate of 7% per annum, robots will be making pizza deliveries in driverless cars before General Mills catches up with Chobani.

Foolish Takeaway

Despite the Yoplait debacle, General Mills remains one of the strongest low beta plays out there for long term investors looking to generate steady income while preserving wealth. If you're looking for a large cap company with lots of liquidity, steady, reliable growth (7.23% over the next five years) and dividends that exceed cash flow and never decrease, then you should consider General Mills for your core portfolio.


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