A Stock That's the Breakfast of Champions

12/02/2009 1:00 pm EST

Focus: STOCKS

Charles Carlson

Editor, DRIP Investor

Charles Carlson, editor of the DRIP Investor, says the maker of Wheaties and Cheerios has held up well in the recession, and pays a nice dividend, too.

Despite a finicky consumer, General Mills (NYSE: GIS) has seen its business hold up extremely well. Its stable of strong brand names, focus on costs, and overseas growth opportunities should drive profits higher in the near and long term.

General Mills owns some of the strongest brands on your grocer’s shelves, including Green Giant vegetables, Old El Paso Mexican food, Häagen-Dazs ice cream, Yoplait yogurt, and Cheerios and Wheaties cereals.

The company’s US retail business accounts for about 69% of sales and 84% of operating profit. International business accounts for around 17% of total sales. Overseas, especially China, Brazil, and India, represents an important growth opportunity for the firm. The remaining business is the company’s bakeries and food service segment, which accounts for around 13% of total sales.

Some consumer-products companies have been hurt by consumers “trading down” to cheaper brands. However, General Mills has managed to maintain its appeal. US retail sales rose 6% in the most recent quarter, with sales gains being recorded across nearly all brand segments.

The performance fueled better-than-expected profits in the August [quarter]—$1.28 per share, up 33% and a whopping 25 cents better than the consensus earnings estimate. General Mills expects the strong operating momentum to continue. The company has raised its fiscal 2010 earnings guidance to a range of $4.40 to $4.45 per share. The new guidance represents growth of 11%-12% from comparable earnings of $3.98 in fiscal 2009.

In addition to solid price appreciation potential, General Mills offers good dividend returns. The current yield is nearly 3%. The dividend was raised 9% earlier this year, with the company paying a quarterly rate of 47 cents per share. Given projected earnings growth, I would expect General Mills to continue to boost its dividend.

You couldn’t tell that 2008 was a horrible year for stocks by looking at a chart of General Mills. The stock is down only slightly from its all-time high of $72 posted in 2008. (It closed below $69 Tuesday—Editor.)

The stock has rebounded strongly since March in line with the overall market, and further strength is likely. The stock is not necessarily cheap at 15x the consensus earnings estimate of $4.50 for fiscal 2010 ending in May, but nor is it especially pricey. The yield of nearly 3% is an added benefit. Investors should use any price breaks to buy these quality shares.

I like General Mills for all seasons. I think the stock will continue to put up decent gains should the market rally continue. And I would expect the “defensive” qualities of the stock to fuel above-average price resiliency should the overall market turn down.

General Mills offers a direct-purchase plan whereby any investor may buy shares directly, the first share and every share. Minimum initial investment is $250.

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