Over the last five fiscal years, the company increased its dividends at an 11% compound rate. On top of this, over the most recent five year period, its compounded returns, both from combined dividends and price appreciation, stood at an extremely attractive 14% per year. During this same time, the average return for the S&P 500 index was 6%.
In this article, I look at the company’s business model and financial situation to examine its ability to sustain growing returns for investors. I look at its peer group to see where the company stands in the packaged foods industry.
Business model and financial analysis
General Mills, Inc. (NYSE:GIS) manufactures and markets branded consumer foods all over the globe. The company also supplies unbranded and branded food products to the commercial baking and food service industries. It was founded in 1928 and is based in Minneapolis, Minnesota. General Mills operates in three business segments, namely U.S. retail, international, and bakeries and food services. As shown in below table, all business segments are generating strong returns for the company.
| Figures in billions | Q3/2013 | Q2/2012 | Change |
|---|---|---|---|
| Net sales | |||
| U.S. Retail | $2.664 | $2.609 | 2.1% |
| International | $1.296 | $1.041 | 24.5% |
| Bakeries and food services | $0.47 | $0.469 | 0.1% |
| Total | $4.430 | $4.120 | 7.5% |
Source: SEC filings
The company’s retail and international segments are growing year-over-year. Recently, it announced Q3 results. Its retail segment grew by 2.1% and its international segment expanded by 24.5%. At the end of Q1, the shining star of this company remains its international segment, even though the retail segment is still generating the highest revenue for the company. On a consolidated basis, General Mills, Inc. (NYSE:GIS) generated overall revenue growth of 7.5% to $4.430 billion.
| Figures in millions | Q3/2013 | Q2/2012 | Change |
|---|---|---|---|
| Operating Profit | |||
| U.S. Retail | $577.3 | $512.5 | 12.6% |
| International | $96.1 | $96.0 | 0.1% |
| Bakeries and food services | $75.4 | $66.5 | 0.1% |
| Total | $748.8 | $675.0 | 13.4% |
Source: SEC filings
On top of this, General Mills has a strong ability to convert growth into profits for investors. The company’s cost-cutting measures are returning results in its margin improvements, which I considered an optimistic sign for the company. At the end of Q4, its total segment operating profit enlarged 11% to $749 million. With solid growth and strong margins, its Q3 net earnings grew to $398 million and diluted earnings per share (EPS) enlarged to $0.60.
Additionally, General Mills, Inc. (NYSE:GIS) has been displaying solid cash flows. Its strong growth in net income provides more potential to strengthen its cash flows. At the end of first nine months, its operating cash flows stood at $2.15 billion, up 29% from year-ago levels. Capital investments and free cash flows through the first nine months stood at $0.412 billion and $1.73 billion, respectively. Its free cash flows also indicate an increasing trend. As a result of these strong cash flows, it has increased its dividends by 9% to $652 million.
Share repurchase program
A share repurchase program is always beneficial for a company and shareholders. Shares repurchases decrease the share count, which increases the demand for the stock. Repurchases also provide more room for the company to increase dividends. General Mills is strongly working on a share repurchase program, which reflects the company’s ability to generate substantial cash. At the end of the first nine months, General Mills repurchased around 19 million shares for a total of $745 million. Presently, General Mills, Inc. (NYSE:GIS)’ outstanding shares stand at 665 million, nearly two million lower than in the past year’s third quarter.
