General Mills (NYSE:GIS) has recently been receiving a disproportionate amount of media attention for all the wrong reasons. The company quietly changed its legal terms last week to say that its customers who participated in brand forums and downloaded coupons online would not be able to file class action lawsuits against it, and they would instead have to resolve their legal issues through 'forced arbitration.' The move sparked outrage among online consumers, which forced the maker of products such as Lucky Charms to beat a hasty retreat and revert back to its former terms.
Now that the dust from the General Mills debacle seems to have settled, it's perhaps a good time to take a deeper look into its business. General Mills manufactures and sells consumer foods. Although the company owns an enviable stable of brands such as Green Giant and Cheerios, it operates in a highly competitive space dominated by stalwarts such as TreeHouse Foods (NYSE:THS) and ConAgra Foods (NYSE:CAG).
The consumer foods sector in general is facing higher costs for raw materials, which is compounded by the fact that many companies in the space are being forced to spend a lot of money on marketing to persuade tight-fisted consumers to part with their hard-earned cash. It's these kind of headwinds that led to a 1.2% decline in the company's top line in the last quarter to $4.38 billion.
General Mills has for a long time been considered one of the best investments in the consumer-defensive sector. The company has a stellar record of paying out dividends consistently for more than 100 years, and it has displayed robust dividend growth.
General Mills hiked its dividend by 17% last year, and has raised its dividend by close to 75% over the last five years. Now, while that is good news, it has come at a cost. The sharp dividend increases have raised the company's payout ratio from under 40% to around 55%. Although that elevated payout level is still within a healthy range, it implies that going forward the company might not increase its dividends at the blistering pace we've seen in the past few years.
General Mills shares have suffered from too much love recently, and they now trade at quite a steep valuation, with a 12-month trailing P/E ratio of 19. In comparison, ConAgra's shares sport a trailing P/E ratio of just 16. TreeHouse's shares are the most expensive with a trailing P/E ratio of 30. On a forward basis, General Mills shares trade at 17 times the company's expected 2014 earnings, versus 13 for ConAgra, and 18 for TreeHouse. General Mills' price-to-book value has shot up by 30% recently to a 10-year high.
However, all is not gloom and doom at General Mills. The stock sports an impressive 3.2% dividend yield, with an even more impressive 7.8% shareholder yield when you factor in the company's share buybacks and debt pay-downs. ConAgra's shares yield 3.3%, while TreeHouse does not pay a dividend.
Although ConAgra beat analysts' consensus earnings estimate last quarter, it has lowered its fiscal 2014 profit guidance twice this year, which is a bad sign. Its private label products and in-house brand sales have been cooling off. The company's consumer-food segment in general saw its volumes decline 3% in the last quarter after its leading brands such as Chef Boyardee, Healthy Choice, and Orville Redenbacher endured torrid sales.
ConAgra's milling segment also declined after the company decided to pass the cost savings on falling wheat prices to consumers. The company is working hard to revitalize its flagship brands through in-store initiatives such as improved packaging and targeting relevant customers. Although the company's shares yield a healthy 3.3% dividend, it has not raised its dividend since 2012 (it currently stands at $1 per annum).
TreeHouse started 2014 on solid footing after posting strong growth in its key segments of food service, groceries, and industrials in the last-quarter. Its bottom line improved 14%, while its gross margin and channel profitability grew at healthy paces.
TreeHouse expects to see good growth in its private-label single serve coffee and hot beverage segment in the coming quarters, and overall top-line growth of 9%-10% in the current fiscal year. The company is quite likely to benefit from the consolidations in the retail food industry, such as the Safeway takeover by Cerberus Capital Management.
Consolidations in the retail food industry often lead to less competitive intensity at the retail level, which in turn tends to benefit private labels. This has been seen in countries like Germany where retail food consolidation has been rampant.
General Mills' shares look a bit too pricey at the moment, and it would be a good idea for investors to wait for a pullback before establishing new positions in the stock. The shares look like a decent investment for income investors due to the healthy dividend and shareholder yield, as well as the company's enviable track-record of consistent dividend payouts.
TreeHouse is a growth company, and the valuation of its shares reflects this. It would be a good idea to balance your portfolio with solid value stocks such as General Mills, and good growth stocks such as TreeHouse.