Prepared by Tara, Senior Analyst at BAD BEAT Investing
General Mills (NYSE:GIS) is of course still a global food colossus. The COVID-19 pandemic has wreaked havoc on the global economy but we have asserted that people need to eat. General Mills as a company has been a beneficiary. That said, there have been increases in key business lines, and decreases in key business lines. We believe shares are still a buy as a defensive play as the stock has held up well during all of this turmoil while offering shareholders a 3.25% dividend yield. This defensive stock seems like an opportunity to sit on a solid dividend yield and possibly some more share appreciation.
It is not a get-rich-quick play, but one that should provide a positive return this year. We believe this is the case given the dividend, recent and projected performance, and possible opportunities for company growth.
Earnings in fiscal Q4 were better, mostly, than what was expected from the consensus estimates. We were expecting a solid sales boost of at least 10% over last year, with the stock uptrend in play as consumers have been staying at and working from home more than ever before. It was very positive to see that the company beat against these expectations. Let us delve further.
Sales came in at $5.02 billion, beating consensus estimates by $43 million. This is such a positive turn-around from past performance. Over the last year, sales have consistently missed estimates. Revenues were up 20% from last year, and the revenue trend has moved sharply higher:
Source: SEC Filings, graphics created by BAD BEAT Investing
The overall sales trend is improving, driven by the solid year-over-year increase. We want to remind you that there was a massive restructuring last year in addition to the acquisition of a pet line of products. In the just-reported quarter, some currency issues weighed, but organic sales growth was incredibly strong. It is worth noting that there was an extra week of business this quarter over last year, and that led to 7 points of the growth. The rest was organic.
Volumes see big boosts
Price hikes have offset declines in volumes in the past, but with massive changes in consumer demand, volumes surged. Looking more closely at the data, we see that there were significant volume changes globally. Volume was up 11 points in Europe and Australia. In addition, Asia and Latin America saw increases, with volumes up 8 points. In North American retail, with COVID-19 driving a ton of a stay-at-home eating trends, volumes were up a whopping 44 points. Weakness was noted in food service and convenience stores, however, with a decline of 16 points, as many places of business were closed or had reduced hours. Now while the volume spiked and the company’s ongoing cost savings initiatives have a small positive benefit for margins, pricing was actually down across the board, with the exception of Europe and Australia where pricing/mix was unchanged from a year ago.
Despite the reduced price/mix issues, gross margins increased 10 basis points to 35.2% this quarter. Even when we adjust for some of the items impacting the ability to compare to last year, we see an increase. In fact, the increase was better than the crude results. Adjusted gross margin rose 80 basis points to 36.1%.
So we saw a big increase in sales, and higher margins. We expect these positive metrics to continue. Operating profit spiked on the back of these winning metrics. Operating profit increased on an adjusted basis to $888 million, rising 24%. We think this positive result is solid given that it was volume-driven, and for once, not driven by price increases. We will continue to see some substantial volume moves in fiscal Q1 2021. Given the results on operating profit, earnings beat expectations:
Source: SEC filings, graphics by BAD BEAT Investing
Earnings came in at $1.10 on an adjusted basis, beating estimates by a $0.04 margin, up 33% from last year.
As the U.S stock market fell at the end of February into March, GIS stock had held up relatively well, and saw sharp gains as a defensive play with folks staying at home. We believe this trend continues as COVID cases continue to spike. The boost may not last forever, but is likely good for a few more quarters. What is more, the dividend is so secure. Further, the yield is still pretty respectful. At 3.25%, the yield is attractive given the stability of the stock. We do not consider this to be a high-yield name but it is above-average yield.
We encourage reinvestment of dividends to compound growth. Make no mistake, historically, General Mills has been considered a dividend raiser for over a decade, hiking the payout each year. We like that. but at these levels, too much equity risk for the underlying company exists. The name is attractive to some because the dividend has been consistently raised up until 2019. The dividend growth was clear before that, but the company faced a lot of problems in 2018. We think it has improved and in this tumultuous market, finding opportunity can be hard. But, people need to eat. With recent trends, future dividend increases are likely.
Given the stock is at $61, is there value here? We believe the stock is slightly overvalued, but this valuation is justified by newfound growth. We still like holding shares here. Using $51, the stock still has some valuation metrics that are attractive, though it is not nearly as attractive as it was when we last got behind the name. Take a look at the valuation analysis our junior analyst Stephanie prepared:
Source: Calculations conducted by BAD BEAT Investing analyst Stephanie using most recent data available relative to consumer staples sector; graphics by BAD BEAT Investing
From a value perspective overall, General Mills is about at fair value here. While the company still has an above-average dividend yield, it is not high by any means, but in this environment it is safe. On a simple price-to-earnings ratio, the stock still has some value, but on most other metrics, the name is either average value or overvalued. At $61, if the stock pulls back into the mid-$50 range it would be a better buy as the value would be more attractive. That said, the stock is to be bought for the dividend and stability. If you can get the discount, it is a good defensive play in our opinion.
General Mills is getting a big volume boost from the COVID-19 pandemic. The pandemic continues to drive many to “stock up.” Growth in some of the key metrics represents a huge turnaround from where the company was back in 2018 and 2019. Regardless of global economic fears or health concerns over the pandemic, people still need to eat. The stock is best served in a long-term, tax-favored account.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.