Purchase: General Mills (GIS)

In late MarchI added General Mills (GIS) to my portfolio as I mentioned in my March Recap.  Here I provide the reasoning and metrics that enabled me to make my decision.

If something seems amiss, call me out.  I can’t learn without knowing I made a mistake!

Overview

General Mills (GIS) is a US based food company.  They sell a large variety of leading brands. Including Cheerios, Nature Valley and Yoplait.  You could easily eat all your meals from GIS!  Like this delicious looking Cheeseburger Crescent Casserole.  Many of their brands are 1 or 2 in their category.  GIS has seven product categories:

  • Small Planet Foods
  • Snacks
  • Big G Cereals
  • Baking Products
  • Frozen Foods
  • Yoplait
  • Meals

GIS has a moat that consists of the brands and the scale of its distribution.  For example, Cheerios has a 14% market share in the cold cereal market.  Brand recognition is key for GIS and they advertise accordingly.

GIS gets approximately 60% of its revenue from the US. The remaining 40% is collected internationally.

Story for ownership

With strong recognizable brands and a large variety of foods, people are going to eat.  GIS makes many foods that are convenient and inexpensive.  GIS gets about 40% of its revenues from outside the US. Increasing living standards in other countries will benefit GIS as people begin to spend money on a larger variety of foods.  GIS is focusing on growth in non-US markets.

Is debt under control*?

*Note: I am using data provided by Morningstar based on the TTM results and the FY14 Q3 report.

When I am analyzing a stock, I want to ensure that they can manage their debt.  I look at the following ratios:

Interest Coverage Ratio: 9
Current Ratio: .81
Quick Ratio: .52
Debt/Capital: ~54%
Is maturing debt spread out?: No

GIS can easily handle it’s interest expenses, with an Interest Coverage Ratio of 9.  Their interest expenses have slowly declined over the last decade from a high of 537 mil to 334 mil (FY13).  While their interest expense declined, the operating income has risen. Burning the candle from both ends!

Normally, I like to see a current ratio above 1, which is a measure of a companies ability to handle short term expenses.  GIS has a Current Ratio of .81 at the end of FY13, which is lower than than it has been over the last five years (greater than .9).  However, in Q314, the current ratio has returned to .97, which is in line more with historical standards.  GIS has a Quick Ratio of .52 (current ratio excluding inventories).  This could be a problem if they had to pay their debts quickly, but with a steady cash flow I don’t see this as an issue.

With a debt to capital ratio of 54%, I do not think that they hold a large amount of debt.  In fact, total debt has remained fairly steady over the last few years.  One note of concern, is that the bulk of GIS bonds mature before 2025, I believe they will be able to handle maturities with their cash flow and benefit from the current low interest rate environment (at least for a few more years).

How does GIS spend your(my) money?

  • Dividends:  GIS pays out approximately 52% of FCF as dividends (60% of EPS based on TTM EPS and new payout). GIS is currently yielding 3.2%.
  • Dividend Streak: 11 years
  • Share Buy Backs: GIS has 654M shares outstanding, which is down from 768M shares in 2004. 29M shares have been purchased F14 YTD.
  • Capex: GIS spends about 600M per year in capex.

Revenues have been increasing each year over the last decade.  EPS has dipped twice in 2006 and 2012, but rebounded the following year.  GIS fared well during the early part of the recession and managed CAGR of 4.4% from 2007 to 2010.

GIS oscillates between spending more on capex + dividends + buybacks than operating cash flow, this difference can only be made up by borrowing additional funds.

Valuation

I currently look at historical metrics to determine if a position has deviated significantly from the mean.  At this time, GIS is trading above it’s historical averages (PE, Price-to-sales).  GIS is trading above its historical dividend rate of 2.9%.

Concerns

GIS has to spend a lot on advertising in order to keep their products in the minds of consumers.  I don’t think this is foreign to the other competitors in the space.  GIS has begun to advertise more online each year, which is good and applicable for younger generations.

With a weakening consumer, the temptation to buy generic store versions of goods can cause an erosion of sales.  For the most part, I think that the product variety reduces the risk because store brands don’t offer the breadth of products that GIS offers.  I can’t even tell you what the generic version of Cheerios is.

A final concern is the potential for a lack of innovation and missing trends.  For example, GIS has done a good job creating Gluten free offerings and will hopefully monitor these trends as consumers tastes change.  I suppose this type of concern is generic and can really be applied to any business with a product or service.

Recent Developments

GIS recently raised their dividend 8% and which increases their dividend growth streak to 11 years.  They have shown a consistent desire to raise their dividend and have done so through a tough recession.

Fiscal Year 2013 is shaping up to be a good year.  Overall, US sales where flat, while the international segment has grown 8% YTD.  The driver for future growth will be the foreign markets that they are operating in.  GIS is partnering(or acquiring) with companies to reduce the risk of entering these markets.  I like this approach because it requires patience and is very deliberate.  This could of course get out of hand if they acquire poorly run businesses regardless of how familiar they are with the market.

Conclusion

GIS has shown a willingness and ability to increase shareholder returns each year.  They are making good moves to ensure that their market share increases in each product line.  Even though GIS is slightly overvalued based on historical measures, I feel like buying an initial position was a good move.  If the price falls somewhat and their aren’t more interesting options out there, then I will consider buying more shares.

Disclaimer:  Long GIS.  

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