However, it always pays to do your research to check out the fundamentals of the companies before investing. It's especially important to see if a company grows its revenue, net income, and free cash flow (the life blood of any business), and see if it can retain some of that cash on its balance sheet.
Let's take a look to see how these companies fare.
General Mills faces domestic market saturation
General Mills sells branded foods to retailers, foodservice, and baking companies under names such as Chex cereal, Mountain High yogurt, and Grands biscuits.Looking at the long-term fundamentals over the past five years, General Mills would fall into the slow-growth category. The company grew its revenue, net income, and free cash flow 22%, 19%, and 23%, respectively.
The underlying numbers point to market saturation on the domestic front -- most people in the United States are already in the habit of buying cereal, snacks, and yogurt. International expansion efforts served as the primary catalyst for top and bottom-line growth in this company over the past five years. Steady capital expenditures as a percentage of sales contributed to free cash flow growth.
How does General Mills look now?
Fiscal year 2014 did not deviate from this trend. Revenue in General Mill's international segment grew 3.6% contributing to overall revenue expansion of 0.8%. International revenue represented the only segment to grow its operating income in 2014.
Looking at General Mills balance sheet, cash to stockholders equity and long-term debt-to-equity ratios clocked in at 13% and 98%, respectively in 2014 . Investors should feel comfortable with cash to stockholder's equity of at least 10% or greater. However, interest from long-term debt chokes out profitability and cash flow over the long term, and General Mills' long-term debt to equity ratio resides in the high range. Investors should strive to look for companies with long-term debt to equity ratios of 50% or less.
The best way to gauge a company's dividend is to look at how much of its free cash flow is paid in dividends in a given year. Like long-term debt to equity, investors should look for companies with a dividend-to-free-cash-flow ratio of 50% or less keeping in mind that cash is needed for other things such as research and product innovation. Last year, General Mills paid out 52% of its free cash flow in dividends meaning that it just barely exceeds that threshold. Currently, General Mills pays its shareholders $1.64 per share per year translating into a 3% yield.
What about McCormick?
McCormick sells spices, gravy mix, and food condiments made for the individual consumer and for the commercial industry such as restaurants.McCormick represents another slow grower. Its revenue, net income, and free cash flow only grew 29%, 29%, and 10%, respectively, over the past five years. Price increases and acquisitions contributed heavily to revenue increases in the past four of those years.
McCormick's overall operating and net margins suffered over the past four years due to restructuring, marketing expense, and lower margins in emerging markets serving as a drag on net income. Cost savings initiatives helped to offset some of these increases in costs. Like General Mills, McCormick's capital expenditures as a percentage of sales remained roughly the same contributing to the increase in free cash flow.
McCormick's is having a decent year so far in 2014 with revenue, net income, and free cash flow all increasing 5%, 8%, and 35%, respectively. Margins also increased due to the cost savings initiatives. However, none of those gains came from product volume, which declined 2%. Expansion in revenue came from price increases and acquisitions.
Looking at McCormick's most recent balance sheet, cash to stockholders equity and long-term debt to equity ratios clocked in at 4% and 51%, respectively, which means that McCormick is cash light and on par with its long-term debt. Last year McCormick paid out 49% of its free cash flow in dividends. Currently the company pays it shareholders $1.48 per share per year and yields 2% annually.
General Mills needs to come up with new products to refuel growth on the domestic front. International expansion definitely needs to continue. General Mills trades at a forward price to earnings multiple of 17.4 bringing it on par with the S&P 500 forward P/E of 17.4. You shouldn't expect too much on the capital gains front, but it may be worth adding to an income-oriented retirement account.
McCormick faces "competitive pressure" on the domestic front according to its latest earnings call. These are words investors don't want to hear. McCormick confronted this pressure by trying to ship early, new product innovations, and keeping a strategic dialogue with customers. McCormick also trades at a higher forward P/E of 19.8 meaning it's more richly valued.Investors may want to play wait and see to see how things play out with domestic competition and continued expansion overseas.
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William Bias has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.