General Mills, Inc. (GIS): Rising Treasury Yield Threatens Low Growth Companies

On the face of it, Campbell and Kellogg seem to have reported extraordinary return on equity compared to General Mills, Inc. (NYSE:GIS) in fiscal 2012. Nonetheless, analyzing the components separately reveals the fact that the exuberantly high return on equity for both companies were mainly backed by the higher financial leverage employed by both of them. Such a high level of debt could be a cause of grave concern for the companies and is particularly not liked by investors as it increases their equity risk.

Lower asset turnover of General Mills, Inc. (NYSE:GIS) was also a partial contributor of its lower return on equity, compared to its rivals, as the company’s assets (12.97%) grew faster than its revenue (11.95%).

General Mills, Inc. (NYSE:GIS) posted terrific growth in its cash flow from operations, fundamentally driven by tax savings that arose from higher depreciation and amortization expense and income from restructuring, impairment, and other exit costs, which is expected to be a non-recurring item. Excluding this component, the year-on-year growth was 41.35%, which is still quite high compared to the company’s peers.

Seneca experienced a drastic fall in its operating cash flows, owing to the plunged net profit margin by 36.3% in FY12 compared to FY11.

In a risky interest rate setting, high yields from fixed income bonds tend to make dividend paying stocks less striking. General Mills is currently offering a dividend yield of 2.74%. In the midst of 10-year Treasury yields above 2.5% coupled with the moderate growth prospects of this company, it does not seem justified to choose the stock over a risk free investment.

Takeaway

If Treasury bond yields continue to rise and growth does not pick up, this could put the stock of General Mills, Inc. (NYSE:GIS) in danger. Under the current circumstances that prevail, I would recommend selling the shares of the company.

The article General Mills: Rising Treasury Yield Threatens Low Growth Companies originally appeared on Fool.com and is written by Awais Iqbal.

Awais Iqbal has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Awais is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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