General Mills (NYSE: GIS) reports earnings for the company’s first quarter of fiscal year 2021 before the markets open on September 23. Investors will be eager to hear if the company can keep up its strong showing from the previous quarter.
As millions of Americans were eating, and snacking, at home, General Mills
posted record revenue of over $5 billion dollars. Investors liked what they heard and drove GIS stock up to levels the company hasn’t seen in four years. However, even a defensive stock like General Mills hasn’t been immune to the sell-off in the market. In the month of September, the stock is down over 10%.
But that still means the stock is up about 10% for the year. And the stock is moving higher as earnings approach. What are investors hoping to see?
Is the trend a friend to General Mills?
The first thing investors hope to see is a confirmation of last quarter’s trend. I don’t believe any investor foresees General Mills delivering another record quarter. That was a pandemic one-off. However, they would like to see evidence that consumers are still committed to eating at home.
What would that look like? Any number north of $4 billion in revenue will be a year-over-year gain and set the company up well for its fiscal second-quarter which is historically its strongest quarter in terms of revenue.
Plus, investors will want to see General Mills continuing to improve its profitability. In fiscal year 2020, the company announced it had expanded its adjusted operating profit by 40 basis points (17.3% of net sales).
What about that dividend?
Value investors have been a bit miffed at General Mills. The company acquired Blue Buffalo for $8.3 billion. General Mills was not just buying its way into the Pet Food category. It was buying the recognized leader in healthy pet food. While many analysts thought the company overpaid, it’s a move that appears to be working out well for the company so far. The company closed out its fiscal year with organic net sales in its Pet segment increasing by 18%.
However, an acquisition like this (and the corresponding debt that comes with it) has added leverage to the company’s balance sheet. And that meant that dividend growth was going to become a lower priority. However, partially due to the pandemic revenue gains, General Mills was able to reduce its debt by nearly $ 1 billion and bring its leverage ratio down to 3.2 times net debt to adjusted EBIDTA. That was approximately the level it was prior to the acquisition.
Does this mean that a dividend increase is coming? Probably not. At least not until the company has a better handle on consumer habits. But with the company generating $3.2 billion in free cash flow in the last fiscal year, it gives dividend investors assurance that the current dividend is in no danger.
The Bottom Line on General Mills
Right now, calling a market top seems to be the favorite sport of analysts. I suppose bragging rights mean something, but I’ve never been a fan of trying to time the market. It’s not like you get a trophy for it.
Instead, I prefer to look at macro trends and invest accordingly. And right now all signs are pointing to a tough few months for equities.
I believe the country is learning to live with the novel coronavirus. However, it still is going to limit the economy specifically in the areas of travel, tourism, and entertainment. That means consumers spending more dollars closer to home.
Virtual schooling and remote work is still the norm for many across the country. This is going to mean breakfasts and lunches being eaten at home.
We have an election that’s likely to be contested for weeks if not months. Investors can deal with the outcome of the election. What they don’t like is uncertainty.
With that in mind, playing defense is not a bad strategy. And General Mills is a defensive stock. It tends to deliver consistent results no matter how well or how poorly the economy is performing.
Investors will be looking to confirm that the company is performing well. But right now, General Mills looks like a solid investment for moderate growth and a reliable dividend.
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