Company Description: General Mills, Inc. is a major producer of packaged consumer food products, include cereal, yogurt and Betty Crocker desserts/baking mixes.
Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value, see page 2 of the linked PDF for a detailed description:
1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number
GIS is trading at a premium to all four valuations above. Since GIS's tangible book value is not meaningful, a Graham number can not be calculated. The stock is trading at a 34.8% premium to its calculated fair value of $38.47. GIS did not earn any Stars in this section.
Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:
1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%
GIS earned one Star in this section for 1.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. The company has paid a cash dividend to shareholders every year since 1898 and has increased its dividend payments for 11 consecutive years.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA) or Treasury bond? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
1. NPV MMA Diff.
2. Years to > MMA
The NPV MMA Diff. of the $1,349 is below the $2,400 target I look for in a stock that has increased dividends as long as GIS has. The stock's current yield of 3.16% exceeds the 2.98% estimated 20-year average MMA rate.
Memberships and Peers: GIS is a member of the S&P 500 and a member of the Broad Dividend Achievers™ Index. The company's peer group includes: Kellogg Company (K) with a 3.0% yield, Campbell Soup Company (CPB) with a 2.8% yield and The Hershey Company (HSY) with a 2.0% yield.
Conclusion: GIS did not earn any Stars in the Fair Value section, earned one Star in the Dividend Analytical Data section and did not earn any Stars in the Dividend Income vs. MMA section for a total of one Star. This quantitatively ranks GIS as a 1-Star Very Weak stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $40.83 before GIS's NPV MMA Differential decreased to the $2,400 minimum that I look for in a stock with 11 years of consecutive dividend increases. At that price the stock would yield 4.0%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $2,400 NPV MMA Differential, the calculated rate is 10.1%. This dividend growth rate is higher than the 7.9% used in this analysis, thus providing no margin of safety. GIS has a risk rating of 2.25 which classifies it as a Medium risk stock.
GIS operates in relatively stable end-markets and has good brand strength, which should offer some protection from less expensive products. However, erratic commodity prices have weighed on the performance of companies in the industry.
In an effort to boost sales and capture market share, the company focuses on introducing a steady pipeline of products. Recently GIS launched a new protein cereal called Cheerios Protein. The idea is to appeal to the growing numbers of health-conscious customers who prefer the convenience of packaged food.
In June 2014, GIS announced a number of cost saving initiatives and expects to achieve $40 million in cost savings in fiscal 2015. By fiscal 2016 cumulative savings from these initiatives are projected in the range of $260 million and $280 million with fiscal 2017 projected cumulative savings above the 2016 levels.
GIS has experienced sluggish revenues and earnings for the past few quarters with lower U.S. Retail sales, offsetting gains at the other two divisions. On November 7th the company lowered its earnings and revenue expectations for fiscal 2015, in response to softness in the U.S and in major emerging markets. Adjusted EPS are expected to grow at a low single digit rate compared to the prior projection of a high single-digit.
The company generates consistent free cash flows and its payout of 57% is well below my maximum of 70%. GIS's debt to total capital of 60% is above my desired maximum of 45%. With a desirable current yield of 3.2%, the company has been on my radar. It is currently trading above my calculated fair value of $38.47. For now I will continue to monitor and wait for a more desirable entry point.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I held no position in GIS (0.0% of my Dividend Growth Portfolio). See a list of all my dividend growth holdings here.
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Tags: GIS, K, CPB, HSY