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Will General Mills Help You Retire Rich?

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Now more than ever, a comfortable retirement depends on secure, stable investments. Unfortunately, the right stocks for retirement won't just fall into your lap. In this series, I look at 10 measures to show what makes a great retirement-oriented stock.

General Mills (NYSE: GIS  ) has graced breakfast tables around the nation for decades, but many investors don't realize just how big a business the food industry is. With heightened competition, it's more important than ever for companies to fight food inflation and keep margins wide. Should investors make General Mills part of a nutritious portfolio? Below, we'll revisit how General Mills does on our 10-point scale.

The right stocks for retirees
With decades to go before you need to tap your investments, you can take greater risks, weighing the chance of big losses against the potential for mind-blowing returns. But as retirement approaches, you no longer have the luxury of waiting out a downturn.

Sure, you still want good returns, but you also need to manage your risk and protect yourself against bear markets, which can maul your finances at the worst possible time. The right stocks combine both of these elements in a single investment.

When scrutinizing a stock, retirees should look for:

  • Size. Most retirees would rather not take a flyer on unproven businesses. Bigger companies may lack their smaller counterparts' growth potential, but they do offer greater security.
  • Consistency. While many investors look for fast-growing companies, conservative investors want to see steady, consistent gains in revenue, free cash flow, and other key metrics. Slow growth won't make headlines, but it will help prevent the kind of ugly surprises that suddenly torpedo a stock's share price.
  • Stock stability. Conservative retirement investors prefer investments that move less dramatically than typical stocks, and they particularly want to avoid big losses. These investments will give up some gains during bull markets, but they won't fall as far or as fast during bear markets. Beta measures volatility, but we also want a track record of solid performance as well.
  • Valuation. No one can afford to pay too much for a stock, even if its prospects are good. Using normalized earnings multiples helps smooth out one-time effects, giving you a longer-term context.
  • Dividends. Most of all, retirees look for stocks that can provide income through dividends. Retirees want healthy payouts now and consistent dividend growth over time -- as long as it doesn't jeopardize the company's financial health.

With those factors in mind, let's take a closer look at General Mills.

Factor

What We Want to See

Actual

Pass or Fail?

Size

Market cap > $10 billion

$29.7 billion

Pass

Consistency

Revenue growth > 0% in at least four of five past years

5 years

Pass

 

Free cash flow growth > 0% in at least four of past five years

3 years

Fail

Stock stability

Beta < 0.9

0.16

Pass

 

Worst loss in past five years no greater than 20%

3.3%*

Pass

Valuation

Normalized P/E < 18

18.55

Fail

Dividends

Current yield > 2%

2.9%

Pass

 

5-year dividend growth > 10%

10.8%

Pass

 

Streak of dividend increases >= 10 years

9 years

Fail

 

Payout ratio < 75%

46.2%

Pass

       
 

Total score

 

7 out of 10

Source: S&P Capital IQ. Total score = number of passes. * This figure is a gain; General Mills hasn't posted a loss in any calendar year in the past five years.

Since we looked at General Mills last year, the company has given up a point, as its valuation rose slightly. But with the stock having risen 20% over the past year, shareholders aren't complaining about the score drop.

Food companies across the industry have had to deal with higher food costs that have threatened profit margins. Indeed, part of the reason that Kraft Foods (NASDAQ: KRFT  ) separated its North American grocery business from its global snack unit was to emphasize the better growth prospects of snacks, acknowledging the slower growth in its grocery offerings. Meanwhile, ConAgra's (NYSE: CAG  ) acquisition of Ralcorp Holdings boosted its presence in the private store-brand food arena, which stands as a major competitive force threatening the higher-margin brand-name products that both General Mills and Kraft Foods sell.

In order to stay relevant, General Mills is seeking to latch onto hot trends. As Fool contributor Nicole Seghetti revealed in her look at the recent Consumer Analyst Group conference, the company is joining rival Kellogg (NYSE: K  ) in offering breakfast drinks for time-strapped consumers.

Still, investors in General Mills have been excited lately about the prospect of a potential buyout. Yet while Heinz was fortunate enough to attract the attention of Warren Buffett, it's hard to imagine other players big enough to take out General Mills who'd be willing to pay a premium to an already high valuation for the stock.

For retirees and other conservative investors, the reason to invest in General Mills isn't takeover speculation but rather the prospects for slow, steady growth. General Mills won't be a growth machine, but it has served long-term shareholders well for a long time and makes a good conservative pick for a retirement portfolio.

Keep searching
Finding exactly the right stock to retire with is a tough task, but it's not impossible. Searching for the best candidates will help improve your investing skills, and teach you how to separate the right stocks from the risky ones.

Kraft Foods is entering a new era after its recent corporate break-up. Its brand power is indisputable and its market share dominates, but like General Mills, Kraft's growth potential is limited and its heavily commoditized categories face massive pressures. In The Motley Fool's brand-new premium report on the company, we guide you through everything you need to know about Kraft, including the key opportunities and threats facing the company. To get started, simply click here now.

Add General Mills to My Watchlist, which will aggregate our Foolish analysis on it and all your other stocks.


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Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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Related Tickers

8/22/2014 3:29 PM
GIS $52.76 Down -0.46 -0.86%
General Mills, Inc… CAPS Rating: ****
CAG $31.87 Down -0.29 -0.89%
ConAgra Foods, Inc… CAPS Rating: ****
K $64.30 Down -0.59 -0.90%
Kellogg Company CAPS Rating: ***
KRFT $57.22 Down -0.05 -0.08%
Kraft Foods, Inc. CAPS Rating: ****

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