General Mills Inc. (GIS, Financial) might seem a bit richly valued now that the stock trades near its 52-week high. Yet, in my opinion, General Mills has the potential rise another 10% higher. By the end of the new fiscal year, my price target for this stock is in the $82 to $85 range. This is because of the combination of the food industry's defensive nature and General Mills' solid dividend.
Slow, steady, safe
Food industry stocks are one of the best consumer defensive investments in a volatile market. The S&P Food and Beverage Select Industry Index was steady from the pandemic outbreak through this month.
General Mills in particular did well. General Mills' shares are up 22.5% over the last 12 months. They rose 35.5% in the past five years. The price-earnings ratio of 18.35 is lower than the average of 21 for its broader industry, although it is higher than the average of 15 in the food products group. Its Beta rating is 0.15. Short interest is a scant 2.22%.
Investors should be aware that management is concerned for high inflation to eat at earnings through the second half of 2022 and into the first quarter of 2023. Management factored this into their earnings outlook. They point to costs for raw and packaging materials and say they are responding by increasing inventories and commitments to suppliers; 55% is already “bought” to keep shelves stocked through the first half of the fiscal year.
Inflation and any remaining bumps in the supply chain might cause a 1% to 2% slip in profit in the new fiscal year’s first and second quarters. Anticipated sales increases of 4% to 5% should offset pressures on margins and profits.
Great company packaging
General Mills manufactures, markets and distributes name brands of baking products, cereals, dough and pastries, fruit, ice cream, prepared meals, organic and natural foods, pet foods and pizza. Its products sell in over 100 countries across six continents.
Statista reports that the 150-year-old General Mills is the eighth leading food and beverage company and fourth leading confectionery company in North America. Management prides itself on innovation, bringing to market foods that sell into new trends, driving organic growth and capitalizing on opportunities for mergers and acquisitions.
Cereals are the core business. Fruit bars, health bars and snacks are among its fastest-growing targeted segments. The company points out its heat and eat breakfast sandwiches as fast growers for their convenience and competition with fast-food restaurants.
Finances are stable
In May, the company reported that its diluted earnings per share for the quarter increased 98%, or 23% in constant currency, to $1.12. Net sales increased 5% for the year. Organic sales for the quarter were 13% higher. Operating profit for the full fiscal year was up 11%. Fiscal fourth quarter operating profit rose 85% to $1 billion. Operating cash flow grew 11%.
The pet foods segment of General Mills had 20% to 30% sales growth, compounded by the July 2021 purchase of pet treat brands. In the fourth quarter, net pet food sales grew 37% year-over-year to $610 million.
I do not expect General Mills' financial results to improve when it next reports earnings results on Sept. 20 due to inflation headwinds.
General Mills has historically used debt to finance growth and pay solid dividends. Its debt-to-equity ratio is 1.22. The company has been reducing debt, but with its enormous market cap, it is unlikely to have trouble borrowing money. The debt has been falling for five consecutive years.
Valuation
The GF Score for General Mills is 78 out of 100. Though highly profitable (8/10), the value rank is minimal (3/10). Momentum is moderate (6/10). Its growth rank just 6/10.
Corporate insiders sold almost one million shares as the price increased. Meanwhile, hedge funds increased their holdings in each of the last three quarters. They added 385.7 thousand shares in the fourth quarter alone.
General Mills pays an attractive 2.78% forward dividend yield, which I believe adds greatly to the value proposition. The company announced on July 22 it is increasing the dividend by almost 6% on Aug. 1 to $0.54. This might stifle earnings per share growth if revenue and profit estimates fall short. History suggests General Mills is cautious but reliable for paying a decent rate of growth without harming reinvestment in the company or earnings.
Commitment to shareholders
Management is committed to rewarding the loyalty of investors with an attractive dividend. They grow the company by increasing organic sales, M&A and using debt to the company’s advantage. In the last fiscal year, General Mills closed on two acquisitions and five divestitures while lowering debt and building inventories.
I like General Mills as an investment because it also commits to business sustainability. General Mills is a company that can grow, reward shareholders, remain financially sound and be a steady investment.
