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General Mills: Deleverage While the Sun Shines

GuruFocus.com
·4 mins read

Packaged food companies, particularly those providing stay-at-home meal preparations, have had a wonderful quarter as a result of the lockdown situation caused by the Covid-19 pandemic.

General Mills, Inc. (NYSE:GIS) is one of the big names in this category to have benefitted from the situation. The company continues to have a strong upside with an expected surge across segments resulting from the work-from-home environment. General Mills also holds a trump card in the form of its pet food segment, which continues to grab a larger slice of the premium pet food market. As of today, the stock looks poised for a bright future ahead, in my opinion.


Company overview

General Mills is a manufacturer and marketer of branded consumer foods and pet food products across the globe. The company offers a wide range of products such as ready-to-eat cereals, meal kits, soup, snack bars, etc.. It also provides organic variants of some of these food offerings. The company supplies both branded as well as unbranded food products to the North American foodservice and commercial baking industries. General Mills also manufactures and markets pet food products, including dog and cat food, through its subsidiary Blue Buffalo Pet Products Inc.

The company has a wide distribution and its products are available through grocery stores, convenience stores, mass merchandisers, membership stores, natural food chains, e-commerce retailers, commercial and non-commercial foodservice distributors, restaurants, pet specialty stores, drug stores, dollar stores and discount chains. General Mills also operates 500 leased and 358 franchise branded ice cream parlors. It employs close to 40,000 people and has its headquarters in Minneapolis, Minnesota.

Financial results

The company witnessed a 21% year-over-year jump in its quarterly revenue to $5 billion. Organic revenues rose by as much as 16%, clearly depicting a jump in at-home food demand. The company's operating profit of $830 million increased by 16% and the adjusted earnings per share (EPS) came in at $1.10, up 33% when compared to the corresponding quarter of the previous year on a constant currency basis. The results beat analyst consensus estimates on both counts.

In the past, General Mills had been known to offset a drop in volume with price rises in its products. However, this quarter has been a different story for the company. It has witnessed a spike in volume across all geographies, not just its core North American market. There was a volume jump in the Asian and Latin American markets too. Over and above this, the management's cost-saving initiatives helped increase the margins and the bottom-line further. The company reported revenue of $17.6 billion for the full fiscal year, an overall increase of 5% year-over-year. The operating profit increased 17% to $3 billion and the adjusted diluted EPS of $3.61 marked a 12% increase on a constant currency basis.

The biggest highlight of the results was the huge amount of free cash that the company has generated. General Mills finished the fiscal year with free cash flow of $3.2 billion, a 42% increase as compared to the previous year. This large amount of cash coupled with an unchanged dividend policy gave room to deleverage the company.

Cash management and deleveraging

General Mills has paid close to $1.2 billion in dividends in its 2020 fiscal year. The company maintained its $0.49 quarterly dividend with an attractive yield above 3%, making it a promising bet for yield investors.

The management had the option to pay out a larger dividend given the rise in the top-line and the free cash flows. Another alternative to appease the yield investors would have been to carry out a share buyback. However, the management has made the financially prudent approach and deleveraged the company using the excess cash to reduce its interest burden. There has been a gradual reduction in the Net-Debt-to-Ebitda ratio of the company over the past couple of years from 4.2 in 2018 to 3.2 today.

In the last fiscal year, General Mills reduced its debt load by as much $950 million. This resulted in the company saving close to $56 million in interest costs, and the deleveraging efforts of the management are expected to continue as they aim for a Net-Debt-to-Ebitda ratio below 3 in the coming year. The lower capital gearing will certainly render more stability to the stock.

Final thoughts

General Mills' stock has appreciated 15% over the past 12 months over and above the 3.16% dividend yield. I think the company has a huge potential upside associated with the highly under-appreciated pet foods category and continued strength in pre-packaged foods.

Disclosure: No positions.

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This article first appeared on GuruFocus.