Let General Mills Command A Position In Your Defensive Portfolio

Recession Resistant General Mills Rockets Higher Outlook 

We’ve been interested in General Mills (NYSE: GIS) for some time now and we couldn’t be happier with the FQ4 2022 results. The company not only beat on the top and bottom line but issued favorable guidance in the face of mounting economic headwinds. The takeaway here is that defensive consumer staple stocks like General Mills are among the best positioned for today’s times and General Mills is among the best picks. Trading at only 18.5X it's earnings outlook the stock is undervalued relative to its peers while paying an above-average dividend and growing the bottom line. 

“General Mills took important steps to advance its portfolio reshaping efforts during fiscal 2022, announcing or closing seven transactions that are expected to increase the company’s top- and bottom-line growth profile over the long term,” said the company in the Q4 release.  

General Mills Attacks Inflation And Scores A Win

General Mills posted a great quarter despite a 500 basis point impact on top-line growth attributed to divestitures and FX conversion. The company reported $4.89 billion in revenue for a gain of 8.2% over last year and it beat the Marketbeat.com consensus by 165 basis points. The growth was driven by a 13% increase in organic sales that are due in large part to pricing and mix. The company says pricing and mix are worth 1400 basis points in revenue and were offset by divestiture, FX, and a 2.0% decline in pound volume. On a segment basis, North American Foodservice led with a gain of 27% which is not surprising given the rebound in hospitality activity. International was weakest at 6% but also felt the largest impact from divestiture while Pet and North American Retail both grew in the mid-teens. 

The margin news is a little mixed but ultimately bullish for the stock. The gross margin expanded 120 basis points on the impact of pricing, lower charges versus last year, and divestitures but the adjusted gross margin did not. The AGM contracted by 70 basis points due to “double-digit inflation” offset by pricing actions and internal efforts to control costs. The good news is the AGM is improving on a sequential basis and should be back to normal very soon. The key takeaways, however, are that operating profit increased by 85% (21% on an FX-neutral basis), and the adjusted EPS is up 23% and 1000 basis points better than expected.

Turning to the guidance, the company is expecting to see organic revenue increase by 4% to 5% which is well above the analyst consensus. The company is also expecting margin improvement to drive EPS growth in the range of 0% to 3% which is also above consensus and we see upside risk in the numbers. 

General Mills Fires Off A Dividend Increase

General Mills fired off a dividend increase as expected but it was much larger than anticipated. The company hiked by 6% versus the CAGR of 1.25% to bring the payout up to roughly 3.0% of share prices. The dividend is backed up by a low 54% payout ratio as well as a rapidly improving balance sheet so we are expecting another increase next year as well. Turning to the charts, the combination of results, guidance, and the dividend increase has the stock up more than 5.0% and trading at a new all-time high. We view this move as very bullish and see it leading to some additional upside. Now that the new high has been set, our next target is up near $82 or about 11% of upside.