General Mills: A Buy For The Long Haul

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

General Mills (NYSE: GIS) has been a great buy for many years. General Mills has been continuously paying dividends over the last 114 years, something that very few companies have done. They also haven't made a single dividend cut in the entire 114 years, which is a phenomenal track record. Recently, the company announced a 15% increase in its quarterly dividends. This increase takes its quarterly dividend to $0.38 per share.

Over the last five fiscal years, the company increased its dividends at an 11% compound rate. On top of this, over the most recent five year period, its compounded returns, both from combined dividends and price appreciation, stood at an extremely attractive 14% per year. During this same time, the average return for the S&P 500 index was 6%.

In this article, I look at the company’s business model and financial situation to examine its ability to sustain growing returns for investors. I look at its peer group to see where the company stands in the packaged foods industry.

Business model and financial analysis

General Mills manufactures and markets branded consumer foods all over the globe. The company also supplies unbranded and branded food products to the commercial baking and food service industries. It was founded in 1928 and is based in Minneapolis, Minnesota. General Mills operates in three business segments, namely U.S. retail, international, and bakeries and food services. As shown in below table, all business segments are generating strong returns for the company.

<table> <thead> <tr><th> <p>Figures in billions</p> </th><th> <p><strong>Q3/2013 </strong></p> </th><th> <p><strong>Q2/2012</strong></p> </th><th> <p><strong>Change</strong></p> </th></tr> </thead> <tbody> <tr> <td> <p><strong>Net sales</strong><strong></strong></p> </td> <td> </td> <td> </td> <td> </td> </tr> <tr> <td> <p><strong>U.S. Retail</strong></p> </td> <td> <p>$2.664</p> </td> <td> <p>$2.609</p> </td> <td> <p>2.1%</p> </td> </tr> <tr> <td> <p><strong>International</strong></p> </td> <td> <p>$1.296</p> </td> <td> <p>$1.041</p> </td> <td> <p>24.5%</p> </td> </tr> <tr> <td> <p><strong>Bakeries and food services</strong></p> </td> <td> <p>$0.47</p> </td> <td> <p>$0.469</p> </td> <td> <p>0.1%</p> </td> </tr> <tr> <td> <p><strong>Total</strong></p> </td> <td> <p><strong>$4.430 </strong><strong></strong></p> </td> <td> <p><strong>$4.120</strong><strong></strong></p> </td> <td> <p><strong>7.5%</strong></p> </td> </tr> </tbody> </table>

Source: SEC filings

The company’s retail and international segments are growing year-over-year. Recently, it announced Q3 results. Its retail segment grew by 2.1% and its international segment expanded by 24.5%. At the end of Q1, the shining star of this company remains its international segment, even though the retail segment is still generating the highest revenue for the company. On a consolidated basis, General Mills generated overall revenue growth of 7.5% to $4.430 billion.

<table> <thead> <tr><th> <p>Figures in millions</p> </th><th> <p><strong>Q3/2013</strong></p> </th><th> <p><strong>Q2/2012</strong></p> </th><th> <p><strong>Change</strong></p> </th></tr> </thead> <tbody> <tr> <td> <p><strong>Operating Profit</strong><strong></strong></p> </td> <td> </td> <td> </td> <td> </td> </tr> <tr> <td> <p><strong>U.S. Retail</strong></p> </td> <td> <p>$577.3</p> </td> <td> <p>$512.5</p> </td> <td> <p>12.6%</p> </td> </tr> <tr> <td> <p><strong>International</strong></p> </td> <td> <p>$96.1</p> </td> <td> <p>$96.0</p> </td> <td> <p>0.1%</p> </td> </tr> <tr> <td> <p><strong>Bakeries and food services</strong></p> </td> <td> <p>$75.4</p> </td> <td> <p>$66.5</p> </td> <td> <p>0.1%</p> </td> </tr> <tr> <td> <p><strong>Total</strong></p> </td> <td> <p><strong>$748.8 </strong><strong></strong></p> </td> <td> <p><strong>$675.0</strong><strong></strong></p> </td> <td> <p><strong>13.4%</strong></p> </td> </tr> </tbody> </table>

Source: SEC filings

On top of this, General Mills has a strong ability to convert growth into profits for investors. The company’s cost-cutting measures are returning results in its margin improvements, which I considered an optimistic sign for the company. At the end of Q4, its total segment operating profit enlarged 11% to $749 million. With solid growth and strong margins, its Q3 net earnings grew to $398 million and diluted earnings per share (EPS) enlarged to $0.60.

Additionally, General Mills has been displaying solid cash flows. Its strong growth in net income provides more potential to strengthen its cash flows. At the end of first nine months, its operating cash flows stood at $2.15 billion, up 29% from year-ago levels. Capital investments and free cash flows through the first nine months stood at $0.412 billion and $1.73 billion, respectively. Its free cash flows also indicate an increasing trend. As a result of these strong cash flows, it has increased its dividends by 9% to $652 million.

Share repurchase program

A share repurchase program is always beneficial for a company and shareholders. Shares repurchases decrease the share count, which increases the demand for the stock. Repurchases also provide more room for the company to increase dividends. General Mills is strongly working on a share repurchase program, which reflects the company’s ability to generate substantial cash. At the end of the first nine months, General Mills repurchased around 19 million shares for a total of $745 million. Presently, General Mills' outstanding shares stand at 665 million, nearly two million lower than in the past year's third quarter.

Competition

<table> <thead> <tr><th> </th><th> <p><strong>General Mills</strong></p> </th><th> <p><strong>Nestle</strong></p> </th><th> <p><strong>Unilever</strong></p> </th><th> <p><strong>Industry Average</strong></p> </th></tr> </thead> <tbody> <tr> <td> <p><strong>P/E</strong></p> </td> <td> <p>18.6</p> </td> <td> <p>21.5</p> </td> <td> <p>21.6</p> </td> <td> <p>32.5</p> </td> </tr> <tr> <td> <p><strong>P/S</strong></p> </td> <td> <p>1.9</p> </td> <td> <p>2.5</p> </td> <td> <p>1.9</p> </td> <td> <p>1.4</p> </td> </tr> <tr> <td> <p><strong>P/B</strong></p> </td> <td> <p>4.7</p> </td> <td> <p>3.8</p> </td> <td> <p>6.6</p> </td> <td> <p>5.3</p> </td> </tr> <tr> <td> <p><strong>D/E</strong></p> </td> <td> <p>0.9</p> </td> <td> <p>0.1</p> </td> <td> <p>0.5</p> </td> <td> <p>0.8</p> </td> </tr> <tr> <td> <p><strong>ROE TTM</strong></p> </td> <td> <p>28.4%</p> </td> <td> <p>18.4%</p> </td> <td> <p>30.4%</p> </td> <td> <p>12.4%</p> </td> </tr> </tbody> </table>

Morningstar.com

General Mills’ main industry peers are Nestle (NASDAQOTH: NSRGY) and Unilever (NYSE: UL). General Mills is clearly trading at a discount over its industry peers. On the negative side, General Mills currently has a high debt-to-equity ratio relative to its main competitors. However, as I discussed above, the company has substantial cash flows that give it the ability to decrease its debt levels.

Nestle has very low debt to equity ratio. Recently, it announced Q1 results with consolidated sales of $21.9 billion. Though its revenue growth remains quite stagnant, it has solid margins on sales. The company is outperforming European markets. Additionally, it is gaining stronger momentum in emerging markets.

On the other hand, Unilever has been displaying a solid financial situation. In the past three years, on average, its revenue growth stands at 8.8% when industry average is at -11.2%. Additionally, it has solid margins on sales. In the ttm, its net margin stands at 8.7% when industry average is at 5%. With a solid financial position, Nestle looks like a strong pick for dividend investors.

Conclusion

General Mills clearly looks like a strong buy for the long haul. The company has a smart investment strategy and strong business model. All of its three business segments are growing at an exceptional pace. Additionally, the company’s ability to consistently improve margins makes it the best company among its peers. The company continues to pay consistently increasing dividends, combined with steady price appreciation. I believe with its strong business model and portfolio of market-leading brands, General Mills should continue generating solid cash flows over the long term.

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siraj sarwar has no position in any stocks mentioned. The Motley Fool recommends Unilever. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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