General Mills is a leading global manufacturer and marketer of branded consumer food, including breakfast cereals, banking items, snack food, ice cream etc. Some of its brands are Cheerios, Pillsbury, Haagen-Dazs and Yoplait.
GIS has been trading between $36.5 and $37.5 over the last month
1- Business Performance Risk (+/=) and intrinsic stock returns (=)
|FCF / Sales||Last twelve months: 9.6% in line with historical performance over the last 10 years.|
|ROE||LTM: 30%, better than the average over the last 5 years of 23%|
|ROA||LTM: 8.7% above average over the last 5 years of 7.0%|
|Revenue Growth||While growth has been slow over the last 5 years, the company has has a 5%+ growth rate over the last 5 years and has never experienced a negative year!|
|Cash distribution to shareholders|| Dividend yield of 2.8% on a payout of 40-45%. |
Stock repurchase: GIS repurchased 17% of its shares over the last 5 years
In terms of intrinsic stock returns, an investor could receive the following:
- 2.8% dividend yield on a 45% payout ratio
- 5.0% growth which using a ROE of 30% would consume 15%-20% of earnings
- The rest (40%) of earnings could be used for share buybacks which – using an earnings yield of 6.2% - could reach another 2.5%
Overall intrinsic stock returns could reach slightly over 10%
2- Balance Sheet Risk (-)
|LT Debt / Equity||1.13x! higher than my personal limit of 1.0x!|
|Current Ratio||1.0x which is higher than GIS' previous position and seems acceptable given the industry|
3- Valuation Risk (-)
|Price to earnings ratio||16.1x higher than the overall market at 14.7x and in line with the company’s average over the last 5 years of 16.5x|
While GIS has a good overall business performance the company is too leveraged for my taste and an investor would be paying a high price for the stock. I will pass for now and would be willing to reconsider GIS if the stock were to come down to ~$31-$32.
Many happy returns!