General Mills: A Decent Dividend Yield And Undervaluation Make It Attractive

General Mills: 4%+ Dividend Yield and Undervaluation Make It Attractive

General Mills Inc. (NYSE:GIS) is a market leader in packaged food, especially cereals, flour, dough, snacks, and pet food. The company is also an interesting dividend growth stock. The dividend yield is over 4%, the dividend safety is acceptable, and General Mills has a 6-year dividend growth streak, making it a Dividend Challenger. Even though leverage is higher than desired, the undervaluation is attractive. Hence, I view General Mills as a buy.

Overview of General Mills

General Mills, Inc. traces its history back to 1856. Today, it operates in four business segments: North American Retail, International, Pet, and North American Foodservice. The food conglomerate is a primary player in grocery stores, big box stores, convenience stores, and food service for restaurants. It owns numerous iconic brands like Cheerios, Betty Crocker, Pillsbury, Gold Medal, Cascadian Farms, Annie’s, Old El Paso, Nature Valley, Blue Buffalo, Wheaties, etc.

Total revenue was over $19,857 million in the fiscal year 2024 and $19,644 million in the last twelve months (“LTM”). The company’s fiscal year ends on the last Friday in May.

Revenue and Earnings Growth

The firm announced mixed third-quarter fiscal year 2025 results on March 19^th, 2025, beating earnings consensus but missing revenue estimates. Revenue fell 5.1% to $4,842 million from $5,099, missing forecasts by ~$111 million. Revenue declined because of lower snacking food sales and retailer inventory reduction. All segments experienced a decline or were flat except Food Service. Certain businesses gained, such as Pillsbury refrigerated dough and Totino’s, but their gains were more than offset by decreases in other product lines. Diluted adjusted earnings per share (“EPS”) of $1.00 were ahead of estimates by $0.04 on slightly higher margins. A somewhat lower diluted share count was a tailwind.

The share price declined based on the results and the FY 2025 guidance. The firm forecasts a 1.5% to 2% decline in organic sales in FY 2025. The share price has lost ~8.9% year-to-date (“YTD”) and ~13.7% in the past twelve months.

General Mills’s revenue has trended up from fiscal year 2015 to 2024, except for declines in FY 2016, 2017, and 2024. Revenue declined from 2016 to 2017 because of lower yogurt sales, inconsistent execution, and divesting the Green Giant brand. It is declined in 2024 because of economic conditions. However, General Mills is growing organically because of product extensions, packaging innovations, and incremental price increases offset by substantial inflationary trends in the past few years.

The company also conducts periodic M&A, which is a growth driver. It has bought several firms in the pet food and snack areas, including Blue Buffalo, Tyson’s Pet Treat brands, Fera Pets, TNT Crust, and Whitbridge Pet Brands, adding to the top line. I last wrote about General Mills when it acquired Tyson’s Pet Treat brands.

We expect the firm to continue strategic tuck-in acquisitions, especially pet food and snacks. However, the firm has also divested brands with little or no growth, like Green Giant, its international yogurt portfolio, Helper Meal, and Suddenly Salad. General Mills is also selling its North American yogurt business and may divest the Progresso brand. These business sales will have a negative impact on future revenue, but may benefit profitability. However, revenue has risen to $17.43 billion in FY 2015 from $19.86 billion in FY 2024.

Although the company should continue its long-term growth, revenue is expected to decline about 1.7% per year in FY 2025 and 1.1% in FY 2026 because of divestments and a slowing economy. Tariffs may also impact the International segment’s sales. That said, the company is trying to accelerate organic sales, conduct efficiency programs, and invest in its businesses. These activities should help grow revenue after accounting for divestments.

Adjusted EPS has increased from $2.86 in FY 2015 to $4.52 in FY 2024. EPS is expected to fall 7.4% to $4.19 in FY 2025, less than in 2024, and drop again to $4.11 in 2026 before reversing. General Mills’ share count is decreasing because of its stock repurchase program. We expect the firm to continue buying back shares aggressively. In fact, proceeds from the yogurt business divestment will probably be used to reduce the share count.

Looking forward, I expect this packaged food company to continue growing because of organic growth and selective M&A. General Mills has slowly repositioned itself in high-growth categories, and we expect acquisitions and divestments to increase the growth rate and profitability.

Recent Challenges and Risks

General Mills’s primary risk is an economic downturn that could negatively impact its customers. Many consumers are sensitive to inflation and price increases, especially in food. They tend to trade branded products for lower-cost generics to reduce spending on food staples. Also, the current administration may ban certain food additives and dyes, increasing cost pressures and lowering margins.

In terms of competition, General Mills is a market leader. However, its main competitors are equally large, with overlap in some businesses. Also, the barrier to entry is not high, and companies come out with new products routinely.

For now, we expect tariffs to have minimal impact on General Mills because most of its sales are in the United States. International sales are only about 13% of the total, with some produced in other countries.

Competitive Advantages

General Mills’s competitive advantage is in its marketing, advertising, manufacturing, and distribution scale. It is the market leader in pet food, cereal, breakfast and snack bars, dough, baking mixes, and other categories. This probably gives the company a narrow moat.

Dividend Analysis

General Mills’s decreasing share price has caused the dividend yield to climb from its 2023 low. It is greater than its 5-year average of 3.26%. The forward yield is about 4.14%, even after the recent market bounce back. This implies an undervalued equity.

General Mills is a Dividend Challenger with a 6-year streak of increases. In the past 5-years, the growth rate has been approximately 3.96%. It was similar in the past decade at about 3.99% because it was held constant after the Blue Buffalo acquisition. The moderate payout ratio of ~53% indicates more future dividend increases. We do not expect the growth rate to change much because of debt and interest payments. The firm gave investors a 9.3% quarterly increase in 2024.

The dividend is supported by acceptable safety. The forward payout ratio is moderate at 53%, based on an estimated consensus FY 2025 EPS of $4.19. This value is below my requirement of 65% or better. The ratio may increase over the next few years because of incremental dividend increases compared to flat or slightly declining EPS growth. The firm’s free cash flow (“FCF”) has declined since 2020, which was boosted because of the pandemic. It was $3,215 million in FY 2020 and fell to $2,529 million in FY 2024. That said, the FCF covered the dividend requirement of about $1,363 million. Assuming $2,500 million of FCF and $1,350 million in dividends this year because of a lower share count gives a dividend-to-FCF ratio of ~54%, well below our desired value of 70% or better.

General Mills’s balance sheet is leveraged. It carries $407 million of short-term and $1,941 million of current long-term debt. Long-term debt is $11,840 million. It holds about $521 million in cash, equivalents, and investments. As a result, the leverage ratio is 3.12X, and interest coverage is only 7.0X. General Mills also receives a BBB/Baa2 lower-medium investment grade credit rating.

Although leverage may be on the high side, investors should be assured about the safety of General Mills’s dividends. I expect payments to continue increasing in the low-single digits.

Valuation

General Mills’s current share price and anticipated EPS in 2025 have caused the valuation to decrease. It is currently at ~13.85X, well below its 5-year and 10-year ranges.

Consensus estimates for adjusted diluted earnings are $4.19 per share in fiscal 2025, $0.33 less than in 2024. We will use 17X as a reasonable, fair-value multiple in the middle of its usual range, accounting for current economic uncertainty, ad hoc tariff policies, and possible inflation. As a result, our fair value estimate is $71.23. The present share price is ~$58.76, indicating that General Mills is undervalued.

Applying a sensitivity calculation using P/E ratios between 16X and 18X, we obtain a fair value range from $67.04 to $75.42. Hence, the stock price is approximately 78% to 88% of the fair value estimate.

Estimated Current Valuation Based On P/E Ratio

Source: dividendpower.org Calculations

How does this calculation compare to other valuation models? Portfolio Insight’s blended fair value model, combining the P/E ratio and dividend yield, estimates a fair value of $73.23 per share. The two-model average is ~$72.23, indicating that General Mills is undervalued at the current price.

However, Wall Street analysts are only slightly bullish, with a price target of $62.87, 6.58% higher than the current value but less than our two-model average. Analysts are generally neutral in their ratings, with two strong buys, three buys, sixteen holds, zero sells, and one strong sell. However, the Seeking Alpha Quant system rating is a hold because of unfavorable growth, momentum, and revisions. However, valuation and profitability are favorable.

Final Thoughts

General Mills is a market leader that grows organically and by M&A. It is a large, packaged food company with a presence in many grocery store aisles and extremely well-known brands. The firm is also a market leader in multiple market segments. The combination gives it attractive characteristics despite near-term headwinds caused by inflation, tariffs, and competition. The firm’s acceptable dividend safety and streak, focus on high-growth consumer staples, and portfolio of brands are attractive. A downside is debt and leverage. However, this stock is suitable for many dividend growth portfolios, especially considering the dividend yield and valuation. I view General Mills as a buy.