General Mills Needs Its Wheaties

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It happens all the time: Experts lecture about the benefits of their products or services but don't practice what they preach. It appears that General Mills (NYSE: GIS) forgot to eat its Wheaties today.

The General Mills fourth-quarter earnings release looked innocent enough when it flashed across my screen this morning. Earnings of $0.72 per share were in line with analysts' estimates and widely beat last year's $0.59 figure. Net sales rose a healthy 10%, aided by new cereal lines and strong Yoplait yogurt sales. The company also produced stellar sales growth of 21% in its international operations. But as I kept reading the news, something made me pause long enough to make the cereal soggy (in reality, I am one of the few humans on this earth who refuse to mix milk with dry cereal).

I love it when companies bury their bad news at the end of the press release instead of coming clean right away. But this is a Fool's task: to sniff out potential problems wherever they exist. The fiscal 2005 outlook for General Mills isn't so rosy. In fact, it has reduced its expectations for the next three years, too. It said rising commodity costs, increased health-care expenses, and "restricted stock expense" will drop its fiscal 2005 expectation to a range of $2.75-$2.80 per share (from the previous mean estimate of $2.95). It also altered its three-year plan fiscal 2004 to 2006 to 3% to 4% EPS growth (previously 5% to 6%) and high-single-digit sales growth (was 11%).

The news isn't all bad for General Mills as it's taking cost-cutting measures and restructuring operations. These frugal steps will slice about $0.10 to $0.15 off earnings next year, but will hopefully make the company more efficient in the future. Additionally, dividend-minded investors will be happy to know that it increased its dividend rate 13% during its fiscal year, giving it a solid dividend yield of 2.39%.

Although General Mills has been slow to respond to the low-carb craze like its competitors Kraft Foods (NYSE: KFT) and Kellogg (NYSE: K), the shares should be seen purely as a dividend play if the economy turns sour. Currently trading at 17 times the newly expected fiscal 2005 estimate of about $2.77, shares appear to be overvalued vs. its soft 3% to 4% three-year growth rate.

Even if you like to drown your dry cereal in milk, crunch over to the General Mills discussion board.

Fool contributor Phil Wohl spent more than 12 years on Wall Street and now concentrates his writing on more fictional characters. He has no stake in any firms mentioned above.