Food companies are known to deliver modest but stable returns, with a sustainable yield as a bonus. But companies like Kellogg Company (NYSE:K) and General Mills, Inc. (NYSE:GIS) have not only outperformed the S&P but are also amongst the top gainers on the street. Shares of General Mills have risen by nearly 25% YTD, while its shares carry a yield of 3.08%. I believe that General Mills is one of the best income growth stocks out there, and here are three reasons to support the claim.
Inorganic growth
General Mills, Inc. (NYSE:GIS)’s debt/equity of 119% may seem pretty high as compared to ConAgra Foods, Inc. (NYSE:CAG)’s 79%, but Kellogg’s high debt/equity of 327% make its peers look fairly leveraged. The common reason for highly leveraged metrics is the acquisitions that consumer foods companies carry out to continue their growth momentum.
Kellogg Company (NYSE:K) acquired Pringles for $2.7 billion last year, which has boosted its overall revenue by nearly 13%. But due to huge size of the buyout, the board of Kellogg decided to temporarily put a halt to its share repurchases to reinstate the financial health of the company. ConAgra also recently acquired Ralcorp Holdings in January. Following this acquisition, ConAgra Foods, Inc. (NYSE:CAG) is estimated to have annual sales of $18 billion, boosting it to the league of large conglomerates. Following the acquisitions the debt/equity ratios of both Kellogg Company (NYSE:K) and ConAgra rose by 41% and 8.45%, respectively.
Keeping the tradition of acquisitions alive, General Mills, Inc. (NYSE:GIS) had acquired Yoplait International, Indian based Parampara Foods, Diablitos in Venezuela and Brazil based Yoki Alimentos. These acquisitions allowed the company to expand in the Brazilian and Indian markets without bureaucratic loops and regulatory hassles. As a result of this acquisition spree, its quarterly operating cash flows have nearly quadrupled over the last three years.
Impressive financials
For the first three quarters of FY12, General Mills reported cash flows in excess of $2.1 billion, up by 40% YoY, with capital expenditures of just $412 million. For the recent quarter, the company reported an impressive 8% increase in sales while its adjusted diluted EPS was up by 16%. Its international operations reported a 24% surge in sales, which was a major contributor to its solid growth. Naturally, the acquisitions were responsible for the stupendous growth rates, but General Mills, Inc. (NYSE:GIS) is not stopping here.
Last year the company announced that it would be launching 100 new products in 2013. These new products would range from yogurt offerings to wheat flakes, and the management expects to revitalize the sales of its slowing down categories. The results have started to show up, and General Mills is reporting growth even in Europe. Since the product roll out is still in process, we can safely the growth momentum to continue into 2014.
Investors delight
General Mills also has a history of paying dividends since 1990, which have been hiked from $0.04 to $0.38 per share. Yet its payout ratio is 46.2%, hinting towards sustainable payouts in the future. At the current price, shares of General Mills, Inc. (NYSE:GIS) yield 3.08% which is stupendous for a company with an impressive growth record.
It also has a share repurchase program underway. In FY12, the company repurchased 19 million of its shares for nearly $745 million and is aiming to reduce its outstanding shares by around 2%. This accounts to a pending share repurchase of nearly $630 million, which should boost its dividend yield to 3.17%.
Wrap Up
Bad economy or good economy, consumer foods companies make money most of the time. With inorganic expansions and a solid balance sheet, General Mills, Inc. (NYSE:GIS) has hedged out the market risks, which looks great for its dividend sustainability and future share buybacks. I believe that General Mills is good enough make it into almost any income growth portfolio, and deserves a buy rating.
The article 3 Compelling Reasons to Buy This Food Company originally appeared on Fool.com and is written by Piyush Arora.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
