General Mills used to be an attractive investment because of its popular food brands, steady earnings growth in good times and bad, and attractive dividend yield. The Minneapolis-based company, which was founded in 1928, has had a leading position in ready-to-eat cereals, Pillsbury flour, and Betty Crocker mixes. But we had mixed feelings about the environmental impacts of its supply chain and the health profile of its products.
Like other packaged food companies, General Mills has struggled to meet changing consumer preferences toward more nutritious, flavorful food and away from the “center aisles” of grocery stores (and the shelves of packaged foods). U.S. cereal industry sales, for example, have fallen 11% over the past five years.
General Mills has responded to these changing preferences by acquiring organic brands such as Annie’s, Cascadian Farm, and Muir Glen, as well as its latest acquisition in the organic/natural category, Blue Buffalo (premium pet food).
The company’s social profile has changed as well – for the better. General Mills has shifted strategy in recent years and is emerging as a leader in sustainable agriculture and transparency. These moves are important not only because they improve General Mills’ long-term resilience, but also because of the impact they can have across the company’s value chain.
As of 2018, the company was the second-largest producer of organic food in the U.S. and has set big goals around transitioning farmland (and its supply chain) from conventional farming to organic. Further, it is financially supporting farmers through the organic transition – including those in the Organic Valley cooperative. Seventy-six percent of its top 10 priority ingredients are sustainably sourced, and it reports annually on efforts to reach 100% from sustainable sources. The company was among the first to voluntarily label GMOs and advocated for a federal standard. It understands the role soil can play in addressing climate change and is working to improve soil health. It has also set science-based greenhouse gas emissions reductions targets.
While many of these initiatives have started through its organic brands, the company is driving its sustainability efforts centrally through its strong system of sustainability governance, which we think indicates that these commitments are more than window dressing.
Because we’re contrarian value investors, the stock’s 30% decline since its January high caused us to take a new look at General Mills. What we found whetted our appetite.
Though General Mills and other packaged foods stocks have historically been popular for their moderate profit growth and defensive stock performance during bear markets and recessions, the group is now quite unpopular. Over the past two years, GIS shares have fallen 28%, while the Standard & Poor’s 500 Index is up 29%. We think this creates an opportunity.
Investors generally remain more worried about missing out on further gains in historically overpriced technology stocks than concerned about protecting their capital in this late stage of an extraordinarily long cycle of rising stock prices. We, however, think it is prudent to reduce portfolio risk, by trimming or selling overly popular, overvalued stocks and reinvesting in unpopular, undervalued stocks that have been left behind (such as GIS) and by holding cash equivalents while awaiting better reinvestment opportunities.
In addition to the depressed stock price and capital appreciation potential, General Mills has a current dividend yield of 4.6%, which is extraordinarily high relative to its own history and to the overall stock market. GIS seems to be a tasty addition to most portfolios in this unappetizing time for the stock market overall.