Sometimes, good investment ideas may just be downright boring. As dull as, say, yet another bowl of a basic breakfast cereal produced by General Mills (NYSE:GIS).
Let’s face it, General Mills isn’t likely to stir up as much excitement or controversy as the likes of Apple (NASDAQ:AAPL), Google (NASDAQ:GOOG) or Amazon (NASDAQ:AMZN). It sells snacks and cereal, not cloud computing solutions. It’s not likely to be one of those sexy stocks that you can brag about owning, because it has generated a 50% return in the last six months, as seen in a stock chart. On the other hand, it is stocks like General Mills that in their stolid, un-flashy way tend to be essential components in the portfolios of the vast majority of investors. And owning them doesn’t mean that you have to give up on earning a reasonable return, either.
Does the fact that General Mills has outperformed the S&P 500 so far this year mean that the company is likely to lag? Probably not. True, it is trading at a slight premium to the index, at a PE ratio of 17.8 times trailing earnings. And yes, Goldman Sachs suggested to clients earlier this year that they may want to sell the stock, warning that it may report earnings that fall short of estimates and that the company may lose market share as it rolls out new cereal products in a crowded marketplace.
Clearly, Goldman Sachs’ analysts aren’t infallible. When General Mills reported its results for the quarter ended February 27 yesterday, its bottom line was up 1.8% over year-earlier levels to 60 cents a share, above the 57 cents per share that analysts had been expecting. True, the surge in grain prices last summer that has lingered and continues to affect raw materials prices for food products companies is eating into profit margins at General Mills
But the fact that General Mills has been able to continue to increase its profits in spite of an erosion in margins and the surge in its input costs speaks well of the company’s ability to manage its business. And that earnings growth may well remain in the single digits: let’s face it, it’s hard to come up with a new variant on frozen vegetables or cereals that will convince people who aren’t already consuming them to jump aboard the bandwagon or get the rest of us so excited that we’ll double our intake. But a lack of drama can be equally appealing, especially in times of economic uncertainty. Consumers will stop buying new cars, electronic gadgets and even new clothing before they will stop picking up a box of Cheerios.
It isn’t as if General Mills isn’t seeking out new sources of growth, however. It has been making a big push into emerging markets, where changing consumer tastes can persuade people who may never have eaten breakfast cereals before to take up the habit. In Brazil, where General Mills has picked up a domestic snack foods company and where it hopes to increase sales of its own brands, cereal consumption is a fraction of what it is in North America or even Europe. And it is almost non-existent in large swathes of Southeast Asia, where most still turn to rice-based breakfast meals, such as congee.
But the ace in the hole for General Mills is its dividend. The company has been rewarding its investors with dividend payments for about a century, nonstop. Not only has it consistently increased the payout level (by about 65% over the last five years, greater than the rate at which rivals have done so), but the dividend yield is significantly above the market average, nearly 3.2%. (It also is paying out only about half of profits in the form of dividends: that signals that the dividend is likely to be safe and sustainable, even if earnings growth falters.)
While the company’s dividend yield has been higher, as it was at the height of the financial crisis when the company’s stock price plunged along with the rest of the market, it remains near the top of the range over the last decade. That means that the stock likely will remain attractive to value or income investors – and will give its existing shareholders a reason to hang onto it, thus limiting selling pressure in the absence of any negative piece of news. After all, while there may be a lot of breakfast cereals or canned soups to pick from on grocery shelves, there aren’t nearly as many very stable (if boring) companies able to generate that kind of total return track record, with such an appetizing looking dividend.
Suzanne McGee, a contributing editor at YCharts, spent nearly 14 years as a reporter at the Wall Street Journal, in Toronto, New York and London. She is also a columnist for The Fiscal Times, and author of "Chasing Goldman Sachs", named one of the best non-fiction books of 2010 by the Washington Post. She can be reached at firstname.lastname@example.org.
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