General Mills is a company that has historically thrived in most economic environments. The company has also invested in regenerative agriculture, an initiative that receives too little attention. Regenerative agriculture is a method aimed at addressing the issue of carbon in the atmosphere. Combining profitability with environmental sustainability is an approach that appeals to many. So, is now the time to buy General Mills?
This is not a financial advice. I am not a financial advisor and I only do these posts in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.
For full disclosure, I should mention that at the time of writing this analysis, I do not own shares in General Mills or in any of their direct competitors. If you want to copy the portfolio or viewing the stocks I currently own, you can find instructions on how to do so here. I have no personal stake in General Mills. However, I do like companies that invest in regenerative agriculture. If you want to buy shares in General Mills, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started on investing with as little as $50.
The Business
General Mills is an American company that traces its history back to the Minneapolis Milling Company, which was incorporated in 1856. With such a long history, General Mills has grown into a global manufacturer and marketer of branded consumer foods. Its diverse product range includes snacks (such as grain, fruit, and savory snacks, nutrition bars, and frozen snacks), ready-to-eat cereals, convenient meals, pet food, refrigerated and frozen dough, baking mixes and ingredients, and super-premium ice cream. General Mills owns over 100 brands available in 100 countries across six continents. The company also holds a 50% stake in two strategic joint ventures that produce and distribute food products in 120 countries: one with Nestlé to sell ready-to-eat cereals outside of the United States and another with Häagen-Dazs Japan to sell super-premium ice cream in Japan. General Mills operates through four segments: North America Retail (approximately 63% of net sales), International (approximately 14% of net sales), Pet (approximately 12% of net sales), and North America Foodservice (approximately 11% of net sales). While the name General Mills may not be familiar to everyone, many of its brands are household names. The company owns several well-known brands, including Häagen-Dazs, Cheerios, Pillsbury, Betty Crocker, Blue Buffalo, Old El Paso, Yoplait, Nature Valley, and Totino's, each valued at over $1 billion. These strong brands give General Mills a significant competitive advantage, or brand moat, which contributes to its ability to deliver free cash flow conversion at a rate well ahead of its peers.
Management
The CEO of General Mills is Jeffrey L. Harmening. He first joined the company in 1994 and has held various positions before becoming CEO in 2017. He holds a bachelor's degree from DePauw University and an MBA from Harvard University. In addition to his roles as CEO and a member of the Board of Directors at General Mills, he serves on the boards of The Toro Company and the Consumer Brands Association, where he is Chairman of the Board. Jeffrey Harmening is known for his focus on natural and organic foods. Since becoming CEO, General Mills has grown to become the third-largest producer of natural and organic food in the United States. He believes that a good leader should possess three key characteristics: authenticity, clarity, and teamwork, qualities that he exemplifies in his leadership style. These characteristics are evidently appreciated by the company's employees, as Jeffrey Harmening has received an employee rating of 80 on Comparably, placing him in the top 5% of CEOs at companies of a similar size. I believe that Jeffrey Harmening's extensive industry experience, his emphasis on natural and organic food, and his high employee rating make him the ideal leader for General Mills. I am confident in his ability to effectively lead the company and achieve positive outcomes.
The Numbers
The first metric to investigate is the return on invested capital (ROIC). We aim for a 10-year history where the ROIC exceeds 10% each year. General Mills has successfully maintained a ROIC above 10% in most years, with the ROIC falling below 10% in only two of the past ten years, and even in those years, the company managed to achieve a ROIC above 9%. It is also noteworthy that General Mills has consistently achieved a ROIC above 10% since fiscal year 2020. Additionally, the company has previously operated with higher debt levels, which means that its return on equity (ROE) figures are significantly higher than its ROIC. Overall, the return on invested capital (ROIC) is acceptable. It is encouraging that the ROIC has remained above 10% for the past five years, and it is hoped that this trend will continue for many years to come.
The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most important of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actual numbers and the percentage growth year over year. General Mills has delivered mixed numbers over the past ten years, with some years showing a decrease in equity. This may be due to the company's several acquisitions and divestitures throughout the decade, which can affect equity levels. Therefore, rather than focusing on year-over-year changes, I prefer to consider the long-term performance, which shows that General Mills has increased its equity by approximately 79% from 2015 to 2024—a very encouraging sign. It is also worth noting that since Jeffrey Harmening became CEO, General Mills managed to increase its equity every year until fiscal year 2023, which was impacted by macroeconomic headwinds.
Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins provide a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. It is not surprising that General Mills has managed to deliver positive free cash flow every year over the past ten years. The company has faced some challenges in the past two years, particularly in fiscal year 2023, when it reported its lowest free cash flow since 2017. However, free cash flow increased in fiscal year 2024, reaching its third-highest level in the past decade, which is encouraging and offers hope for the future. The levered free cash flow margin also declined in fiscal year 2023, and while it improved in fiscal year 2024, it remains at its lowest point since fiscal year 2017, excluding fiscal year 2023. Hopefully, the company will be able to increase this margin moving forward. The free cash flow yield is slightly below the ten-year average, which includes some exceptionally high figures from 2018 to 2021. However, it is at its highest level in the past three years, suggesting that the shares are trading at a better valuation than they have in some time. This is a factor we will revisit later in the analysis.
Debt
Another important aspect to consider is the level of debt, and it is crucial to determine whether a business has manageable debt that can be repaid within a period of three years. This can be assessed by dividing the total long-term debt by earnings. For General Mills, this calculation reveals that the company has 4,53 years of earnings in debt. While this is higher than what I would typically prefer, it is not alarming. It is also worth noting that this figure is slightly below the ten-year average of 4,85 years of earnings in debt. Although I generally prefer to invest in companies with lower debt levels, the current debt level of General Mills does not deter me from considering an investment. However, I do believe that the debt level is worth monitoring moving forward if one is considering investing in General Mills.
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Risks
Based on my findings thus far, I believe that General Mills is an interesting company. However, no investment is without risk, and General Mills also faces its share of challenges. One significant risk is competition. General Mills operates in a highly competitive market, contending with pressure from large food manufacturers, regional brands, and increasingly popular private labels and generic products. During economic downturns or periods of uncertainty, consumers often turn to more affordable private-label options, which can erode General Mills' market share. The company has responded to this competition with increased promotional spending and discounting, which can negatively impact profit margins. Additionally, rapid changes in consumer preferences necessitate constant innovation; failure to meet these evolving demands could further affect sales and brand loyalty. Both domestic and international competitors possess substantial resources to invest in aggressive pricing, marketing, and innovation. General Mills must continuously differentiate its products and effectively communicate their value to maintain market share. If it cannot compete effectively in this dynamic environment, the company’s revenue growth, market share, and profitability could be adversely affected.
Another risk for General Mills is losing its favorable brand perception. Maintaining and continually enhancing the value of its many iconic brands is critical to the company’s success. General Mills' performance relies heavily on a strong, positive perception of its brands. If consumers' views become unfavorable, it can reduce demand, hurt sales, and erode market share. Several factors can negatively impact brand perception, including negative publicity, perceived irresponsible actions, product quality issues, food safety concerns, and reduced advertising efforts. With the rise of social and digital media, this risk is amplified, as negative information can spread rapidly and potentially cause significant damage to the brand's reputation. If General Mills fails to maintain positive consumer perceptions, it could face declining sales, higher costs to rebuild brand equity, and a competitive disadvantage in a crowded market.
Another risk for General Mills is its dependence on one large customer. Relying on Walmart for 22% of its consolidated net sales and 30% of its North America Retail segment sales presents a significant vulnerability for the company. This high concentration of revenue means that General Mills is exposed to considerable risk; if Walmart reduces orders, changes terms, or stops purchasing certain products, it could severely impact General Mills' sales and profitability. Walmart's size also creates a bargaining power imbalance, enabling it to demand lower prices, extended payment terms, or increased promotional support. If General Mills cannot meet these demands, it risks losing shelf space or facing terms that could compress its margins. Additionally, dependence on a single large customer like Walmart makes General Mills highly susceptible to changes in Walmart's strategy or market position. For instance, if Walmart shifts its focus toward promoting private labels or alters its product stocking policies, demand for General Mills' products could decline. This reliance reduces General Mills' diversification and heightens its financial vulnerability, making it more challenging to recover lost sales through other customers or channels.
Reasons to invest
There are several reasons to consider investing in General Mills. One notable reason is the company's Accelerate Strategy. Launched in 2021, this strategy aims to drive sustainable, profitable growth through portfolio reshaping, operational efficiencies, and strategic acquisitions. General Mills has already reshaped 20% of its portfolio, focusing on high-growth brands that align with market demand, thereby strengthening its long-term growth prospects. A key element of the strategy is cost savings through Holistic Margin Management (HMM). In the most recent fiscal year, General Mills achieved nearly 6% savings in the cost of goods sold, exceeding expectations and allowing for reinvestment in growth areas such as brand building and innovation. This focus is expected to drive improved market share and profitability. The strategy also emphasizes disciplined acquisitions in high-growth categories like breakfast, snacking, and pet food, as evidenced by recent acquisitions such as Edgard & Cooper. These acquisitions leverage General Mills' capabilities to achieve faster growth and better margins, thereby enhancing its financial performance. Additionally, General Mills' commitment to regenerative agriculture, with over 500.000 acres enrolled in its program, aligns with the growing consumer and investor interest in sustainability. This effort supports its "standing for good" initiative within the Accelerate Strategy, which could attract ESG-focused funds and reinforce brand loyalty.
Another reason to consider investing in General Mills is its Pet Food segment. The pet food segment, led by the Blue Buffalo brand, remains a key growth driver for General Mills. Despite some recent challenges, the company is focused on returning this segment to growth in fiscal 2025 by increasing investment in marketing and product innovation. These efforts include expanding the successful "ingredient superiority" messaging, launching new products like Tastefuls Purees and seasonal gifting packs, and extending the Wilderness line to meet diverse consumer needs. These initiatives align with the ongoing "humanization" trend, where pet owners increasingly seek premium, high-quality food for their pets, driving long-term demand. General Mills is also working to improve profit margins in the pet food segment, maintaining competitive margins around 20% through cost efficiencies and reinvesting savings into growth. Strategic partnerships with retailers to enhance product visibility and marketing efforts further strengthen the segment’s growth prospects. With a robust strategy focused on innovation, marketing, cost management, and collaboration, General Mills is well-positioned to capitalize on the growing pet food market, making it an attractive investment opportunity with significant potential for long-term returns.
Another reason to consider investing in General Mills is its ability to capitalize on consumer trends. General Mills is well-positioned to take advantage of key consumer preferences, making it an attractive investment opportunity. The company recognizes that taste is the primary driver of consumer choice, and in fiscal 2025, it plans to enhance the flavor profile of 30% of its North America Retail products. By focusing on taste improvements, such as making Pillsbury biscuits flakier, Annie's mac & cheese cheesier, and Betty Crocker brownies fudgier, General Mills is directly addressing consumer preferences to drive growth. Additionally, as consumers increasingly seek healthier options, General Mills is expanding its portfolio with products like Old El Paso's Carb Advantage Taco Shells and Mott's Apple Streusel Soft-Baked Bars. The company is also increasing the availability of reduced-sugar options, aligning itself with the health and wellness trend. In response to the growing demand for convenience, particularly for at-home consumption, General Mills is launching new products like Totino's Breakfast Snack Bites and Nature Valley Soft-Baked Breakfast Bars, catering to the need for easy, on-the-go options. General Mills is also focused on delivering compelling value, understanding that consumers desire more than just low prices; they seek great-tasting products their families will enjoy without waste. The company is meeting this need through value-oriented product offerings, strategic pricing, and packaging options that appeal to a broad range of consumers. With 86-87% of food now being consumed at home, General Mills' diverse portfolio, which includes both premium and everyday offerings, is well-positioned to capture demand from consumers who prioritize affordability and quality.
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Valuation
Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators for free.
The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 4,31, which is from the fiscal year 2024. I have selected a projected future EPS growth rate of 7%. Finbox expects EPS to grow by 6,6% in the next five years. Additionally, I have selected a projected future P/E ratio of 14, which is double the growth rate. This decision is based on General Mills' historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be $29,34. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy General Mills at a price of $14,67 (or lower, obviously) if we use the Margin of Safety price.
The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 3.191, and capital expenditures were 824. I attempted to analyze their annual report to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 577 in our calculations. The tax provision was 595. We have 559,1 outstanding shares. Hence, the calculation will be as follows: (3.191 – 577 + 595) / 559,1 x 10 = $57,40 in Ten Cap price.
The final calculation is referred to as the Payback Time price. It is a calculation based on the free cash flow per share. With General Mills' free cash flow per share at $4,48 and a growth rate of 7%, if you want to recoup your investment in 8 years, the Payback Time price is $49,18.
Conclusion
I believe that General Mills is an intriguing company with the potential to thrive in any economic climate, as there will always be a need for food. Furthermore, its strong portfolio of brands provides a significant competitive moat, exemplified by the company’s ability to deliver a free cash flow conversion rate well ahead of its peers. General Mills has achieved a ROIC above 10% since 2019 and recently delivered its third-highest free cash flow ever in fiscal year 2024. Competition remains a constant risk for General Mills, as the company faces intense pressure from other brands and private labels. This competitive environment can lead to price cuts, reduced margins, and a continual need for innovation to maintain market share and profitability. Additionally, losing favorable brand perception poses a risk, as it could reduce demand, hurt sales, and erode market share - especially in the digital age, where negative information can spread rapidly. Should the company fail to maintain a strong brand image, it may face declining sales, increased costs to rebuild consumer trust, and a weakened position in a competitive market. Dependence on Walmart for a significant portion of sales also presents a risk, as any reduction in orders or unfavorable terms could severely impact General Mills' sales and profitability. However, the company's "Accelerate" strategy is promising, as it focuses on driving sustainable growth through portfolio reshaping, cost savings, strategic acquisitions in high-growth categories, and a commitment to sustainability - enhancing market share, profitability, and appeal to ESG-focused investors. The pet food segment should drive growth for General Mills moving forward, thanks to its emphasis on innovation, marketing, and cost management, aligning with the growing "humanization" trend in pet care that is driving long-term demand and improving profit margins. General Mills is also enhancing its product portfolio to meet the growing demand for taste, health, convenience, and value, aligning with key consumer preferences and positioning itself for sustained growth in a predominantly at-home consumption market. I believe General Mills could be a great addition to diversify one's portfolio, as it has historically outperformed the broader market during periods of low consumer confidence. However, given the high debt levels and underwhelming levered free cash flow margin, I would require a 50% discount on two out of three of my valuation calculations before considering an investment in General Mills. This means I would be willing to buy shares below the Payback Time price of $49.
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