General Mills (NYSE:GIS), like many packaged food companies, has struggled with shifting consumer tastes and competition from healthier or private label brands in recent years. However, General Mills still fared much better than rival Kraft Heinz (NASDAQ:KHC), which lost over 30% of its market value this year as it spooked investors with a $15 billion writedown, a dividend cut, an SEC probe, and delayed SEC filings.

General Mills' stock rallied about 40% this year, easily outperforming the S&P 500's 20% gain. That enthusiasm may seem surprising, since General Mills generates very little growth in a slow-growth industry. However, its stable returns, high dividend, and lack of drama compared to Kraft Heinz made it an attractive defensive play in a volatile market.

A bowl of Cheerios.

Image source: Getty Images.

Let's see why General Mills -- which owns Cheerios, Häagen-Dazs, Yoplait, and other well-known brands -- remains a better food stock than Kraft, and why it's still a solid investment for conservative investors.

Anemic revenue growth with expanding margins

General Mills' organic sales growth -- which excludes acquisitions, divestments, and currency fluctuations -- remained nearly flat over the past year. But its reported sales growth, which were significantly boosted by its takeover of premium pet food maker Blue Buffalo last April, rose significantly throughout fiscal 2019.

Metric

Q1 2019

Q2 2019

Q3 2019

Q4 2019

Q1 2020

Reported sales

9%

5%

8%

7%

(2%)

Organic sales

0%

(1%)

1%

0%

(1%)

Year-over-year growth. Source: General Mills quarterly reports.

Unlike Kraft Heinz, which focused heavily on cutting costs and avoiding big purchases, General Mills bought big companies like organic food maker Annie's, Brazilian food company Yoki Alimentos, and Blue Buffalo to diversify its business away from older products and boost its long-term revenue growth.

During the first quarter, the growth of Blue Buffalo mostly offset General Mills' flat growth in North America and the declines across its other business units. That dynamic will likely continue and buy General Mills more time to launch new products (like Blueberry Cheerios and Yoplait Smoothies), acquire other companies, or divest weaker brands.

A grocery cart in a supermarket aisle.

Image source: Getty Images.

General Mills expects its full-year organic sales to rise 1%-2%, and for its reported sales (which include an extra week in fiscal 2020) to grow 1%. Kraft Heinz's organic sales stayed negative over the past two quarters, and it refuses to offer any guidance for the full year. Analysts expect its reported sales to fall 4%.

General Mills gradually raised prices over the past year to offset its slower shipments. Kraft did the opposite, slashing prices in a desperate bid to boost its sales. As a result, General Mills' gross margin rose 190 basis points annually to 34.7% last quarter, while Kraft's gross margin fell 260 basis points to 32.5%.

General Mills' operating margin also rose 180 basis points to 16.5% in the first quarter, and it expects its adjusted operating margin to improve 2%-4% on a constant currency basis for the full year. Kraft's operating margin plunged 880 basis points to 11.5% last quarter, even as it prioritized a "zero-based budgeting" strategy to cut costs and streamline its spending.

General Mills expects its adjusted EPS to rise 3%-5% for the full year. Kraft didn't offer any earnings guidance, but Wall Street expects its earnings to decline 26%.

Kraft is cheaper than General Mills, for obvious reasons

Kraft trades at 11 times forward earnings, which is lower than General Mills' forward P/E of 16. Kraft's forward yield of 5.4% is also much higher than General Mills' 3.6% yield.

Those metrics suggest that Kraft is the cheaper stock, but investors are avoiding it because its core business is weaker, it hasn't resolved its accounting issues, and new CEO Miguel Patricio hasn't offered a compelling turnaround plan.

General Mills doesn't run a perfect business, but its growth is stable, it prioritizes margins over sales growth, it offers investors clear guidance, and it doesn't struggle with basic tasks like SEC filings. Therefore, General Mills remains a much better overall investment than Kraft Heinz, and a solid play for income investors.