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Nathan Parsh
Nathan Parsh
Articles (155) 

General Mills: Strong Organic Sales and a Return to Dividend Growth

The company delivered another strong organic sales number and also returned to dividend growth

September 24, 2020 | About:

Shares of General Mills Inc. (NYSE:GIS) have decreased slightly following my look at the company after excellent fourth-quarter earnings results. The company delivered one of its largest year-over-year increases ever and managed to top analysts' elevated estimates for both revenue and profits.

General Mills followed that up with another top and bottom line beat for the first quarter of the current fiscal year. In addition, the company announced its first dividend increase in several years.

Let's look at why the most recent quarter, dividend announcement and low valuation are all signs that investors should be buying General Mills.

Quarterly highlights

General Mills reported first-quarter earnings results for fiscal 2021 on Sept. 23. The company's revenue grew 9% to $4.4 billion, which was $151 million higher than what Wall Street analysts had expected. Aside from the prior quarter, this is the highest growth rate in several years. Currency was a 1% headwind to net sales during the quarter. Adjusted earnings per share improved 21 cents, or 27%, to $1, beating estimates by 13 cents. The adjusted effective tax rate was 21.9%, compared to 20.9% in the prior year.

Analysts following the stock had expected organic growth of 6.9%, but the company delivered 10%. Nearly every segment contributed to organic growth.

The North American Retail segment's sales increased 14% to $2.7 billion as organic volume growth more than offset weaker price and mix. The U.S. region once again benefited from higher demand for food at home during the Covid-19 pandemic. Heavier products, especially refrigerated baked goods, dessert mixes and soups, performed exceptionally well. Meals and Baking was the standout business as sales were up 31%.

Overall, North American Retail improved its market share in eight out of the 10 largest U.S. categories. Market penetration was also higher for the company itself and compared to competitors. Repeat rates grew in all but one category. The company added 30 new manufacturers during the quarter in order to satisfy demand. This segment did see higher media spending, which led to an increase in expenses.

While the company didn't break out e-commerce sales numbers like it did in the previous quarter, leadership did note that its Betty Crocker and Pillsbury food websites have a combined 7 million unique monthly visitors. These websites saw a 91% increase in visits from those in the 18 to 24-year-old demographic. U.S. retail saw a shift toward young and Hispanic households during the quarter, which should help bring about future growth as well.

The Europe and Australia division had flat organic volume growth, but pricing and mix was 7% higher. Including a benefit to foreign exchange and a headwind from a divestiture, reported net sales were up 8% to $491 million. Old El Paso and Haagen-Daaz were the main drivers of growth, but Betty Crocker dessert mixes also contributed to results.

Roughly half of sales for the Europe and Australia segment normally come from the yogurt, snacks, ice cream and foodservice channels. This segment doesn't see as much of a contribution from the meals and baking categories, where the Covid-19 pandemic has really been a catalyst.

The Asia and Latin America business had 17% organic growth, mostly due to incredibly high-volume gains, but foreign exchange was a 10% headwind to results. This marks a return to growth following a difficult fourth quarter. Sales came to $383 million. The segment also saw higher demand due to at-home dining. Yoki seasonings and Kitano meals and snacks were sources of strength in Brazil, while the Wanchai Ferry brand saw increasing demand. Betty Crocker dessert mixes saw growth in the Middle East. The away-from-home food market made some improvements from the prior quarter, but Haagen-Dazs ice cream shops have had trouble gaining traction following the closing of restaurants. Retail ice cream, on the other hand, continues to be solid.

Pet organic sales improved 6% to $392 million for the quarter as volumes more than made up for lower pricing. This organic growth is in addition to the mid-teens percentage that the company saw in the first quarter of the previous fiscal year.

Dog and cat food were both up year over year, driven by high growth rates for wet foods and treats. Built up inventories in the previous quarter likely kept a lid on sales for the most recent quarter. Blue Buffalo channel checks continue to show higher household penetration. The company has also started transitioning pet owners to a subscription model in hopes of capturing more recurring revenue.

Convenient Stores and Foodservice was the lone segment to see a decline. Organic sales fell 12% to $392 million due mostly to lower volumes. Away-from-home demand continues to be down compared to the previous year, but this was at least a deceleration from the fourth quarter, when organic sales declined 24%. Management said that consumer traffic in key channels hasn't returned to pre-Covid levels.

Adjusted operating margins improved a full percentage point to 36.2%, while adjusted operating profit margins were higher by 210 basis points to 19.1%.

General Mills has also worked to deleverage its balance sheet since acquiring Blue Buffalo in 2018. Net debt to adjusted Ebitda stood at 4.2 at that time, but fell to just 3 in the most recent quarter. This helped lead to an $8 million decline in interest expenses for the company. The company also expects to deliver 4% in cost savings. Free cash flow improved 2.1% to $584 million.

General Mills also announced that it was raising its dividend by 4.1% for the upcoming Nov. 2 payment. This is the first increase since 2017. The company had paused its dividend growth as it reduced its debt burden. That has begun to be accomplished, so shareholders were able to receive a dividend raise. The company has paid an uninterrupted dividend for more than 120 years. Shares have a forward yield of 3.5% based off of the current price of $59. This is higher than the 10-year average yield of 3.3%.

The company hasn't provided guidance for the fiscal year due to the uncertainty regarding the pandemic, but analysts surveyed by Yahoo Finance expect earnings of $3.57 per share for 2021. This gives the stock a forward price-earnings ratio of 16.5, below the decade-long average valuation of 16.9 times earnings.

Final thoughts

General Mills followed up an excellent fourth quarter with another very good quarter in its own right. All but one business segment posted growth, with Asia and Latin American returning to the green. Away-from-home continues to be a struggle and likely will be until a full reopening of the world's economies takes place. That isn't likely in the short term, but General Mills' other businesses are firing on all cylinders. North American Retail, the largest segment, contributed the largest amount of organic growth.

General Mills also raised its dividend and now yields better than its long-term average. The forward price-earnings ratio is also favorable compared to the historical average.

The business performance, dividend history and valuation continue to make General Mills an appealing option for investors.

Disclosure: The author has a long position in General Mills.

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About the author:

Nathan Parsh
I am originally from Detroit, Michigan, before moving to Maryland to begin a career as an educator. This is my 14th year teaching. My wife and I have two young children who keep us on our toes.

Rating: 3.0/5 (2 votes)



Praveen Chawla
Praveen Chawla premium member - 2 months ago

Blue Buffalo was acuired in mid-2018 for $8 biliion, so I don't think its accurate to say its "organic growth". Revenue growth over the last 5 years is flat even with the acqusition.

Nathan Parsh
Nathan Parsh - 2 months ago    Report SPAM

Hi Praveen,

I see what your chart says, but I pulled the organic growth rates from the company's press release. I also looked at revenue totals per year that Seeking Alpha provides and they seem accurate. Revenue growth over the past few years has been solid, but that is coming off of a decline. Not sure where the discrepancy might come from.

Praveen Chawla
Praveen Chawla premium member - 2 months ago

Thanks. Blue Buffalo was a successful acquisition which has turned the revenue decline to growth, but they did pay up for that. I did buy it in the low 40's but got out in earlier this year.

Overall it's a good company which should provide good returns. If it gets back to the mid to low 50's I might get into it again.

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