General Mills: In Transition

10/05/2018 5:00 am EST

Focus: CONSUMER

Jack Adamo

Editor, Jack Adamo's Insiders Plus

General Mills, Inc. (GIS) is a company in transition during an extremely competitive and trying time for its industry, explains Jack Adamo, growth and income specialist and editor of Insiders Plus.

Food inputs costs are rising, transportation costs are rising and inflation in general is showing up in the supply chain. The slide in the stock price this past week was understandable considering its weak fiscal Q1 earnings report. Despite an 8.8% increase in revenues, largely resulting from acquisitions, EPS fell 6%.

I'm okay with this for now. General Mills is a company in transition during an extremely competitive and trying time for its industry. Food inputs costs are rising, transportation costs are rising and inflation in general is showing up in the supply chain.

The company has been working hard and effectively on rationalizing costs while growing the company in the areas where the potential is greatest. Such restructuring while integrating new acquisitions involves significant investment. What matters is the long-term effect.

Some of its well-known brands include Betty Crocker, Bisquick, Gold Medal Flour, Pillsbury, Cheerios, Chex, Total, Trix, Wheaties, Green Giant, Progresso and Häagen-Dazs. In the healthy-eating category it owns Good Earth, Fiber One, Nature Valley and Yoplait Yogurt. It also acquired Blue Buffalo, a natural pet food company, as well as natural food brand Annie.

General Mills has a track record that inspires confidence. In the last twenty years, the stock has more than quadrupled, even after the 33% pullback over the last two years. The stock yields 4.4% at our buy price. The payout ratio is toward the high side at 75%, but not dangerously so.

There is still money left for growth, especially since operating cash flow was 53% higher than earnings and free cash flow (OCF minus cash used in investing in property, plant and equipment) by my calculation was more than 18% higher.

Despite the recent price dip, we are getting a good dividend — and at least until the coming recession rears its ugly head — I think we should do well with the stock. In fact, as food stocks often attract investors as safe havens during downturns, we might even get a lift from coming troubles. General Mills, Inc. is a buy up to $45.50.

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