Two of the largest and most popular companies in the world producing breakfasts and packaged foods are Kellogg Company (NYSE:K) and General Mills Inc (NYSE:GIS). Many people love eating Corn Flakes, Frosted Flakes, Cheerios, and Yoplait for breakfast, but only a few really know that besides getting energy for the day with every spoon of their favorite corn flakes, they might be happy having one of these longstanding (to say the least) dividend stocks in their portfolios as well. Just imagine, General Mills is respected by many investors for its unbelievable 117-year uninterrupted payout history (including its predecessor firm). Its colleague, Kellogg Company, lagged behind with “only” about 90 years of consecutive dividend payments. Not bad, huh? So, let’s dig a bit deeper and try to see which company would be a better fit for today’s investor, and how the most prominent money-managers in the world position these stocks in their portfolios.
Most investors don’t understand hedge funds and indicators that are based on hedge funds’ activity. They ignore hedge funds because of their recent poor performance in the bull market. Our research indicates that hedge funds partly underperformed because they aren’t 100% long. Hedge funds’ fees are also very large compared to the returns generated, which reduces the net returns delivered to investors. We uncovered through extensive research that historically, hedge funds’ long positions in certain stocks actually outperformed the market greatly, and it has held true to this day. For instance, the 15 most popular small-cap stocks among funds has beaten the S&P 500 Index by more than 85 percentage points since the end of August 2012. These stocks returned a cumulative of 145% vs. less than 60% for the S&P 500 Index (read the details). That’s why we believe investors should pay attention to what hedge funds are buying, particularly in the small-cap sector, rather than what their net returns are.
General Mills Inc (NYSE:GIS) is a Minneapolis-based, $33.68 billion company. The stock has made its investors happier this year, appreciating by 6.75%, not to mention the current, solid dividend yield of 3.11%. Adding to the fantastic 117-year-old dividend history, we should mention that the company not only managed to maintain the payouts over this time, but it also has been making rather frequent increases. Kellogg Company (NYSE:K) is a bit smaller of a company, with a market cap of $22.18 billion, and is headquartered in Battle Creek, Michigan. Kellogg has a nearly identical dividend yield of 3.09%, but has depreciated by 3.65% year-to-date. Compared to General Mills, Kellogg’s dividend history is a bit less impressive, both in terms of time period and the magnitude of increases.
The valuation of General Mills looks more attractive, given its P/E ratio of 24.61 versus the 50.47 of Kellogg. Still, the price-to-sales ratio suggests the opposite, though not with the same striking difference, since the sellers of Kellogg’s stock ask 1.53x times its revenues, while General Mills is traded at a 1.88x multiple. A quick glance at profitability turns the scales in favor of General Mills, which has higher and, what is also important, more stable operating margins and returns on equity. Its most recent earnings report showed that General Mills’ return on equity stands very close to its ten-year average of 24.75%, while Kellogg has only a 14.96% rate under the same metric. In defense of the latter, we should mention that its historic ROE is around two times larger than General Mills’ figure, but at the same time Kellogg is more leveraged, having 83.26% of debt-to-assets, while General Mills does business at 76.73%.
The insider activity has been mostly bearish for both of the stocks over the last three months. Kellogg Company (NYSE:K)’s top executives have sold around 1.07 million shares, valued at $67.46 million. General Mills Inc (NYSE:GIS)`s directors were not as harsh with their ward, as they sold only 330,827 shares with a market value close to $18.83 million.
Our extensive database, which covers the latest moves of the largest hedge funds, allows us to draw conclusions about the general sentiment of fund managers regarding selected stocks. As of March 31, 24 funds owned equity stakes in General Mills Inc (NYSE:GIS), valued at $423.29 million in their portfolios, which was up by 26.46% compared to the end of the last quarter of 2014. The money managers seems to be less optimistic regarding the bright future of Kellogg Company (NYSE:K), since they slashed their holdings in the company by 7.87%, leaving some $434.67 million in shares. Fund ownership also declined to 18 from 23 during the first quarter. Based on this information, we can say that in general hedge funds are more in favor of General Mills, though their ownership is relatively low overall for such large-cap stocks.
Richard S. Pzena’s Pzena Investment Management added 6% to its position in Kellogg Company (NYSE:K), becoming the top shareholder in our database with 1.68 million shares valued at $110.65 million. Joel Greenblatt, managing Gotham Asset Management, owns a $72.88 million position in the stock, or some 1.11 million shares. His bet on Kellogg Company was increased by 155% over the first three months of the year. To join its colleagues, the third-largest shareholder, Winton Capital Management, added an additional 55% to its own stake, lifting the total amount of shares in its portfolio to 985,423 shares valued at $63.61 million. The other hedge funds in the list of top ten shareholders, except for one, were positive on the stock during the first three months of the year.
Follow Richard S. Pzena's Pzena Investment Management
As for General Mills Inc (NYSE:GIS), its largest owner, Mario Gabelli’s GAMCO Investors reduced its holding by only 2%, which looks like a small re-balancing move rather than any real pessimism, leaving 2.53 million shares valued at $142.96 million in its portfolio. Ken Griffin’s Citadel Investment Group dramatically increased its ownership by 794%, bringing the total position to 1.82 million shares valued at $103.11 million. In general, the top ten owners showed positive dynamics, with a minor exception for two funds which made small adjustments to their position.
The final decision about the stock does not leave many chances to Kellogg Company (NYSE:K). We have seen that these days General Mills Inc (NYSE:GIS) is better by many characteristics including better dividend history, valuations, profitability, and the sentiments of the best fund managers in the world. Therefore, our conclusion for this pair of breakfast specialists would be dip your spoon into the shares of General Mills Inc (NYSE:GIS).
Winner: General Mills Inc (NYSE:GIS)
Disclosure: None
