The prospects of an economic downturn heavily weighed on financial markets in 2022. The S&P 500 index dropped 19% last year. But consumer staple stocks fared quite well amid the market sell-off. For instance, shares of General Mills (GIS -0.77%) surged 28% higher in 2022.
This raises the question: Have investors missed the boat on the stock? Let's take a closer look at General Mills' fundamentals and valuation to get an answer.
Iconic brands are driving revenue and profits higher
Tracing its roots back to 1866, General Mills is one of the most established consumer staple companies in the world. Product launches and acquisitions over the years have allowed it to grow its portfolio to 100-plus brands that are sold in over 100 countries around the world. General Mills' most iconic brands include Blue Buffalo pet food, Chex Mix snack mix, and Cocoa Puffs cereal.
The latest performance has been solid. For the second quarter (ended Nov. 27), net sales increased 3.9% year over year to $5.2 billion. What variables contributed to this solid growth?
General Mills' organic net sales surged 11% higher. Compensating for the inflationary environment, the company implemented price hikes throughout its businesses. Coupled with a more favorable sales mix in the lucrative North America food-service segment, this boosted organic net sales by 17%. And because consumers are loyal to General Mills' products, organic volume fell just 6% for the quarter.
There were also challenges. As a result of the robust performance of the U.S. dollar against foreign currencies, the company faced a 1% headwind from foreign currency translation. In addition, the divestitures of the European yogurt business and the Suddenly Salad side dishes business weighed on net sales to the tune of 5%.
These elements explain how General Mills' net sales growth clocked in just below 4% during Q2. The company generated $1.10 in non-GAAP (adjusted) diluted earnings per share (EPS) growth in the quarter, up 11.1% over the year-ago period. Thanks to respectable cost management, General Mills' non-GAAP net margin edged nearly 60 basis points higher year over year to 12.7%. Paired with a 1.8% decrease in the company's outstanding share count, this led to adjusted diluted EPS growth ahead of net sales growth during the quarter.
Due to General Mills' well-known brands and ability to execute savvy, bolt-on acquisitions, analysts believe that adjusted diluted EPS will grow at 6.5% annually over the next five years.
Image source: Getty Images.
The dividend is built to last
General Mills' 2.6% dividend yield isn't flashy. But compared to the S&P 500 index's 1.8% yield, it gets the job done. And if above-average income wasn't enough to convince income investors, the dividend is well-covered and has room to grow further.
This argument is supported by a dividend-payout ratio that will come in around 52% for the current fiscal year poised to end in May. This gives General Mills the flexibility to repurchase shares, keep its debt burden under control, and complete acquisitions to strengthen the business. For this reason, I am confident that more dividend raises like the most recent 5.9% hike lie ahead for shareholders.
A quality stock at a discounted valuation
After General Mills' massive rally in 2022, it's understandable that investors would think they missed their chance to buy the stock. But in taking a closer look at General Mills' valuation, that doesn't seem to be the case.
The stock's forward price-to-earnings ratio of 20.3 comes in just below the S&P 500 consumer staples sector average of 20.9. While certainly not a downright bargain, any discount for a blue-chip stock like General Mills shouldn't be taken for granted. This is what makes the stock such a compelling buy at current levels.
