General Mills: Featured Stock In October's Safest Dividend Yields Model Portfolio by David Trainer

in syndication •  7 months ago 


  • General Mills is the featured stock in October’s Safest Dividend Yields Model Portfolio.
  • This Model Portfolio only includes stocks that earn an Attractive or Very Attractive rating, have positive free cash flow and economic earnings, and offer a dividend yield >3%.
  • Companies with strong free cash flow provide higher quality and safer dividend yields because we know they have the cash to support the dividend.
  • Looking for more stock ideas like this one? Get them exclusively at Value Investing 2.0 . Get started today »

Featured Stock for October: General Mills

General Mills (GIS) is the featured stock in October’s Safest Dividend Yields Model Portfolio.

GIS has grown revenue by 1% compounded annually and after-tax operating profit (NOPAT) by 4% compounded annually over the past decade. Trailing twelve month NOPAT is up 17% over the prior TTM period. NOPAT growing faster than revenue is driven by GIS’ rising NOPAT margin, which has increased from 10% in 2009 to 14% TTM.

Figure 1: GIS’ Revenue and NOPAT Since 2009

Sources: New Constructs, LLC and company filings
GIS’ Free Cash Flow Supports Dividend Payments
Since 2015, GIS has increased its annual dividend from $1.67/share to $1.96/share, or 4% compounded annually. This dividend payment has been supported by GIS’ cumulative free cash flow. With the exception of 2018, when General Mills acquired Blue Buffalo Pet Products, the company consistently generates the free cash flow necessary to pay its dividend, per Figure 2. Excluding 2018, GIS generated $8.7 billion (29% of market cap) in FCF while paying $4.4 billion in dividends since 2015.

Figure 2: GIS’ FCF vs. Dividends Since 2015

Sources: New Constructs, LLC and company filings

Companies with strong free cash flow provide higher quality dividend yields because we know the firm has the cash to support its dividend. On the flip side, dividends from companies with low or negative free cash flow cannot be trusted as much because the company may not be able to sustain paying dividends.

GIS’ Valuation Implies Permanent Profit Decline

At its current price of $50/share, GIS has a price-to-economic book value (PEBV) ratio of 0.8. This ratio means the market expects GIS’ NOPAT to permanently decline by 20%. This expectation seems too pessimistic given that GIS has grown NOPAT by 4% compounded annually over the past decade and 7% compounded annually over the past two decades.

If GIS can maintain TTM NOPAT margins (14%) and grow NOPAT by just 2% compounded annually for the next decade, the stock is worth $73/share today – a 46% upside. See the math behind this reverse DCF scenario.

Critical Details Found in Financial Filings by OurRobo-Analyst Technology

As investors focus more on fundamental research, research automation technology is needed to analyze all the critical financial details in financial filings as shown in the Harvard Business School and MIT Sloan paper, "Core Earnings: New Data and Evidence.”

...Read the Full Post On Seeking Alpha

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