As discussed in my last post, my weighting towards consumer non-cyclical stocks is quite heavy. This led me to explore multiple sectors in international markets. I found some interesting companies in China like Sinopec, China Mobile, and Alibaba. In India, business services company Infosys caught my eye. International insurance company, Chubb Limited, has a very low payout ratio, a stable business, a strong track record, and is a dividend champion. Even with all these opportunities I couldn’t pass up General Mills. I originally purchased the company at $60/share and watched it fall to $42. The company faces rising costs, changing consumer habits, and a higher debt level. These challenges, concerning as they may be, provide a steep discount and an opportunity to lock in a 4.5% starting yield.
General Mills can trace its founding to 1856 when they incorporated as the Minneapolis Milling Company. Essentially the company has been in business for over 160 years. In that time period, we experienced the Civil War, the Great Depression, two World Wars, numerous labor movements, and countless periods of civil unrest. And over the course of a century and a half I’d expect consumers to change their tastes from time to time. Therefore, in the grand scheme, General Mills doesn’t appear to be in that much trouble. After all, revenue is finally increasing, the debt is manageable, the dividend is safe, and the company has numerous world class brands.
More recently, General Mill’s experienced core sales growth of just 1%; basically, flat year over year. Certain product lines continue to struggle, and commodity prices are on the rise. However, prices also inched a bit higher to compensate. Even better, the company reported increasing market share among eight of its nine food categories. The fiscal 2019 outlook still stands, and the company continues to integrate its Blue Buffalo acquisition. General Mills expects Blue Buffalo to grow sales by double digits in the coming year. With organic sales only expanding by 1%, Blue Buffalo’s business gives the overall company a 9-10% revenue bump. Even with the higher debt load, it appears as if General Mills has nearly succeeded in “buying” growth.
Overall, operating profit is expected to expand at a rate between 6% and 9%. For dividend investors we get a 4.5% starting yield and a healthy payout ratio. Again, I don’t like how I invested more into consumer staples given my already heavy weighting towards the sector. I just felt compelled to take advantage of the deep discount. Almost everything else on the market is either fairly-valued or over- valued. And despite the risk of buying General Mills, history is on their side. If they can survive 160 years I feel like they can get through these moderately challenging times. Even if I have to wait a few years, I still expect solid gains from this company in the future.
DISCLAIMER: I am long on General Mills (GIS). I am not a licensed investment adviser or tax professional. I am not liable for any losses incurred by any parties. This blog should be viewed for entertainment and/or educational purposes only. Any transactions published are not recommendations to buy or sell any securities. Please consult with an investment professional before making investment decisions.