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Will General Mills Help You Retire Rich?

http://www.fool.com/investing/general/2012/02/28/will-general-mills-help-you-retire-rich.aspx

Dan Caplinger
February 28, 2012

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.

Cereal may not seem like a glamorous business, but General Mills (NYSE: GIS  ) has turned it into a highly profitable one for decades. With a wide variety of food products, General Mills goes beyond the breakfast table in its effort to capture the appetites of its customers. With food inflation having hurt margins, however, does General Mills have what it takes to stay successful? 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 $24.5 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 2 years Fail
Stock stability Beta < 0.9 0.18 Pass
  Worst loss in past five years no greater than 20% 1.6%* Pass
Valuation Normalized P/E < 18 17.74 Pass
Dividends Current yield > 2% 3.2% Pass
  5-year dividend growth > 10% 11.1% Pass
  Streak of dividend increases >= 10 years 8 years Fail
  Payout ratio < 75% 48.8% Pass
       
  Total score   8 out of 10

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

Since we looked at General Mills last year, the company has kept its eight-point score. With a nice dividend increase, General Mills got another year closer to earning its ninth point.

Rising food prices have challenged not only General Mills but other players in the industry as well. Kraft Foods (NYSE: KFT  ) and ConAgra (NYSE: CAG  ) have also seen the input costs of the ingredients they use for their processed-food offerings rise. But like Kraft and ConAgra, General Mills has been able to pass on much of tha