General Mills Stock Has Strong Post-Pandemic Prospects

General Mills NYSE: GIS was one of the few stocks that didn’t crater in March of 2020. Shares dipped slightly, yes, but nothing compared to the typical stock. While it wasn’t clear that the pandemic was going to benefit companies like Peloton NASDAQ: PTON and Wayfair NYSE: W, pantry loading was a predictable outcome (have you seen how people react when there is six inches of snow in the forecast?).

Now that COVID-19 vaccines are being widely distributed, however, there is fear that General Mills is going to struggle without the pandemic tailwind. The company released its fiscal Q3 2021 earnings (the period ending February 28, 2021) last week; the numbers were solid, but raised concerns about the company’s post-pandemic prospects. Those concerns, it turns out, are overblown.

Let’s start by looking at the earnings release.

For the fiscal third quarter, General Mills’ revenue rose 8% yoy to $4.52 billion, beating analyst estimates of $4.45 billion. The 8% revenue growth rate marked a slight acceleration from Q2 2021 levels. General Mills earned 96 cents a share for the quarter, better than the 74 cents per share from the year-ago period, but below analyst estimates of 84 cents a share.

General Mills’ 2018 acquisition of Blue Buffalo Pet Products continues to pay off. The pet segment’s third quarter revenue increased 14% yoy to $436 million. The double-digit growth was far from an anomaly; the segment’s sales are up 13% yoy over the last nine months. While the pet industry as a whole has been booming, the Blue Buffalo brand “continued to gain market share in measured channels in the first nine months of the year.”

The company expects that the “pandemic will drive continued elevated consumer demand for food at home, relative to pre-pandemic levels” during the fiscal fourth quarter. That said, management pointed out that the company is going to face tough comps from the “initial pandemic-driven surge.” Of course, General Mills will have a hard time measuring up over the following three quarters as well.

Investors Need to Keep Their Expectations in Check

Millions of Americans are getting vaccinated every week and the weather is starting to get warmer. It’s only a matter of time before the restaurant industry is back to pre-pandemic levels. That recovery will come at the expense of General Mills, which sells snacks, cereals, and other packaged foods.

Investors need to be prepared for the company’s sales growth to slow considerably over the next four quarters. But it’s important not to miss the forest for the trees. After the packaged foods industry normalizes, growth should come back.

General Mills Has an Attractive Valuation and Dividend

General Mills isn’t the type of company that is going to run off 3-5 years of double-digit revenue growth. But the price reflects reasonable expectations; shares are changing hands at just 16.5x forward earnings. If General Mills can grow sales in the mid-single-digits over the long run – not much to ask – shares would have additional upside.

With a yield of 3.26%, General Mills is a great dividend stock. That is nearly double the 10-year treasury yield – even after the massive spike. You also don’t have to worry about General Mills cutting its dividend; its payout ratio is less than 50%.

How Should You Play General Mills?

General Mills is not going to make you rich, but this is the type of stock that has a high floor and a medium ceiling. Some look at brands like Cheerios, Totino’s, and Pillsbury and doubt that General Mills has even a medium ceiling. But the pet products segment gives the company (as a whole) that type of upside.

GIS shares are pulling back a bit after a three-session surge. But the down-days have occurred on lower volume than the up-days, indicating that the pullback should be short-lived.

With shares approaching the 200-day moving average, a reversal should be looked at as a buying opportunity.