The first thing that comes to mind when I hear the name General Mills (NYSE:GIS) is their wonderful selection of cereals. That was something that had a huge part of my childhood upbringing so naturally, I want to like the company. however, I will put my own bias aside and look at the healthiness of GIS through an analytical lens. The price has come down from the high of $90.89/share and the dividend yield is about 3.7%. We can see that over the last decade, the total return of GIS compared to the S&P 500 (SPY) has been lackluster so this makes me question if the company deserves a spot in my portfolio.
As a quick summary, General Mills is a global manufacturer and marketer of consumer foods. It operates within several segments such as North American retail stores, International, Pet, and North American Foodservice. The company offers a wide range of products including cereals, yogurt, soup, meal kits, pet food, and more. General Mills sells its products through various channels including grocery stores, e-commerce retailers, and pet specialty stores.
Risk: Losing Sales To The Store Brand
GIS had a decent second quarter, with EPS reaching $1.25, surpassing expectations by $0.09. However, the company’s revenue for the quarter stood at $5.1 billion, down 2% compared to the previous year. The decline in revenue was primarily due to lower sales volume. I think there are plenty of factors contributing to this. One of them is the increase in grocery prices which makes people lean towards “store brands” over brands under the GIS umbrella. Tons of layoffs, higher inflation, increased housing costs, and record-high debt levels are causing people to budget a little more tightly.
As we can see, the growth of private label sales has grown in several categories. In fact, nearly half of US shoppers prefer to buy store brands. 37% still prefer national brands like General Mills but two-thirds of this group still said they are open to purchasing private labels. In my own personal experience, my family and I have opted to go for the store brand more often than not when shopping since it’s generally more affordable to do so and the products are usually close enough in quality.
After all, food prices are projected to continue to rise throughout 2024. Food prices rose at an average of 2.7% from December 2022 to December 2023. With the price of groceries projected to continue rising, I expect store brands to continue gaining market share throughout the year.
For the rest of 2024, GIS adjusted its outlook for net sales which are now expected to remain flat or decrease by 1%. This adjustment reflects a slower-than-anticipated recovery in sales volume and as previously mentioned, I think a big factor is the shift to the private label store brands that consumers are choosing.
Adjusted operating profit and diluted earnings per share are now projected to increase by 4-5%. This revision is attributed to the impact of slower organic sales growth, offset by higher cost savings. For reference, revenue growth has matched this outlook over the last 5-year period at an average of 4.88% per year. Management still maintains its expectation for free cash flow conversion to be at least 95% of adjusted after-tax earnings. As a sign of confidence, GIS bought back around 18.8 million shares, amounting to $1.3 billion during the first six months of their fiscal 2024.
To offset the lower sales, they are likely to continue raising prices. However, you can’t keep this cycle up forever as eventually customers are likely to go elsewhere, such as the private label brands. It’s rough from the consumer side as inflation and higher prices cause shifts in spending habits and the internal side for GIS. Management anticipates input cost inflation to remain around 5% of the total cost of goods sold. This inflation is mainly due to rising labor costs affecting sourcing, manufacturing, and logistics expenses.
Lastly, the company aims to achieve “Holistic Margin Management” cost savings equivalent to approximately 5% of the cost of goods sold in fiscal 2024. This target has been raised from the previous expectation of 4%. To help offset lower sales, they are focusing on managing costs across various aspects of the business, including procurement, production, and distribution. I think this a good hedge on management’s behalf but it still doesn’t address the sales issue. It will be interesting to see how this plays out over the next couple of quarters.
As of the latest declared dividend of $0.59/share, the current dividend yield is about 3.7%. The dividend was previously raised by 9.3% back in June of 2023. With a healthy payout ratio of 51%, I expect management to announce another raise at the mid point of this year. For reference, the sector median payout ratio is approximately 50% so GIS sits within the same range.
Fun fact: General Mills has been paying a dividend since 1898. While this is incredible in itself, I still don’t think that the dividend has grown at a fast enough rate. Over a 10-year period, the dividend increased at a CAGR (compound annual growth rate) of 4.62%. Over a smaller time frame of three years, the dividend still only grew at a CAGR of 4.92%. For a stock yielding less than 4%, I would ideally like to see a higher level of growth.
Therefore, I don’t think GIS belongs in my personal portfolio or any dividend growth portfolio. The lack of dividend growth means that there are plenty of better choices out there if you are looking for quality dividend growth companies. However, I do understand holding a position in GIS if you are looking for a reputable company that has an amazing track record of consistency with paying shareholders. If all you are looking for is reliable income, then GIS shouldn’t let you down.
According to management during the last earnings call, the profit EPS guidance is between 4 – 5%. The annual EPS estimate for full-year 2024 is about 4.48x. When you input these two into a DCF calculation, we can determine a rough fair value estimate for shares of GIS. As you can see, we can come to fair value estimate of $77.65/share. This would represent a potential upside of about 20% from the current price level.
The average Wall St. price target is $68.63 which represents a modest upside of 5.86%. The highest price target is $82.20/share and the lowest is $58/share so our estimate falls within the higher end of this range assuming they can meet this 4% EPS growth estimate. If you combine this potential upside with the current dividend yield of 3.7%, you are looking at some solid future returns.
In addition, the current P/E is 14.34x while the 5-year average P/E is 17.01x. This may further reinforce that shares are currently discounted. However, this fair value estimate assumes that consumer spending toward name-brand items improves and that management can meet the expected growth projections. If they do not, I could see shares of GIS trading sideways or even downward if sales do not dramatically improve throughout the next few earnings reports.
I have a bit of a mixed outlook here. I do think that GIS is a solid company but so far, the underperformance in relation to the SPY and the lackluster dividend growth makes it truly hard to recommend. However, when you compare the performance of GIS to its peers, you can see that they outperformance the majority of the peers. So if you want some exposure to this sector, GIS is a solid choice.
In conclusion, General Mills may not be the best stock to own at the moment due to the general shape of the market with high inflation, consumer spending habits towards private label brands, and declining sales. While the company boasts a strong legacy and a diverse portfolio of consumer foods, recent performance such as lackluster dividend growth, raises concerns about its attractiveness for investors looking to get a solid total return and collect a sustainable stream of growing dividend income.
Despite management’s efforts to offset lower sales through cost-saving measures and share buybacks, uncertainties still exist regarding its ability to sustainably improve sales and profitability. While GIS remains a reputable company with a track record of consistency, I think money is better suited elsewhere.
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