Kellogg vs General Mills Scorecard

By Chad Henage - February 22, 2012 | Tickers: GIS, K | 0 Comments

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Many people wake up every day with a product made by either Kellogg (NYSE: K) or General Mills (NYSE: GIS). When it comes to guaranteed sales its been said that people cut out a lot of things, but they have to buy cereal. Both companies sell other products as well, but cereal is the core of both businesses. Since most investors only choose one company from a certain industry to hold in their portfolio let's compare these two cereal titans and see which one comes out on top. We'll keep score and the one with the highest total at the end wins. 

When it comes to current valuation and expected growth, this is as close to even as you can get. Both companies are well established, and have consistent performance. This lends to their higher PEG ratio. These companies are the stalwart companies that Peter Lynch used to refer to that help you sleep at night. (Kellogg – 1, General Mills – 1)

Since valuation is a tie, let's look at dividend yield and growth. Kellogg has a current yield of 3.31% versus General Mills pays 3.18%. Kellogg had a long string of increases that flatlined between 2000 and 2005, but then resumed their upward trajectory. General Mills has a similar history of increasing dividends, then a flat line, then additional increases. Since both companies pay nearly the same yield and have similar histories, we have to look at dividend growth to decide. Kellogg has a 5 year dividend growth rate of 7.46%, versus General Mills growth rate of 10.38% over the same time frame. (Kellogg – 1, General Mills - 2)

I always like to look at prior growth, to determine the likelihood of future growth occurring. It's more reasonable to believe a company can grow in the future, if they have in the past. Kellogg's past growth rate is 4.89% versus 10.74% for General Mills. (Kellogg – 1, General Mills – 2)

Share buybacks can be a positive sign for shareholders, as it shows the company believes its shares are a good value. Both companies have been buying back shares. Kellogg takes the smallest edge as they have repurchased shares in 4 of the last 4 quarters. General Mills has repurchased shares in 3 of the last 4 quarters, but issued shares in 1 of the last 4. (Kellogg – 2, General Mills – 1)

Free cash flow is a core metric I use to evaluate stocks. To make the numbers even, I compare how much free cash flow a company generates compared to their total assets. The theory is, the company with the higher cash flow per $1 of assets is the more efficient. Kellogg has generated $0.049 of free cash flow per $1 of assets in the last year. By comparison, General Mills has generated $0.0675 of free cash flow per $1 of assets. This is a huge benefit to General Mills shareholders. This additional cash flow can be used to increase the dividend, repurchase shares, make investments, and pay down debt. Clearly on a free cash flow basis, General Mills is the better company. (Kellogg – 1, General Mills – 2)

Last, I like to compare the companies balance sheets. Generally speaking, the less debt the company has, the less risk. Kellogg has a relatively high ratio of debt-to-equity at 2.32. General Mills has a much lower debt-to-equity ratio of 0.798. (Kellogg – 1, General Mills – 2)

Totaling up the scores, we find that Kellogg scores a 7, and General Mills scores a 10. It seems that General Mills is the better value. With similar growth profiles, and similar dividends, it really comes down to cash flow and balance sheet strength. Since General Mills generates 37% more free cash flow per $1 of assets, the company has more opportunities to reward shareholders. General Mills balance sheet is more than twice as strong as Kellogg which also bodes well for shareholders. In this battle the General is the clear winner. Let me know if you agree or disagree in the comments section below.

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