A trusty blue chip every retiree should own

Safety, reliability, nice dividends and global leadership make this company a perfect stock for retirement portfolios.

By StreetAuthority May 2, 2014 8:15AM
General Mills Cheerios © Stephen Hilger/Bloomberg via Getty Images
By Tim Begany Street Authority

People retiring now or in the near future have my sympathy. It's a tough time to be retired.

Few people have a pension anymore, and Social Security doesn't provide anywhere near the purchasing power it used to. So, as never before, the onus for financial security in retirement is on the individual.

Clearly, retirees need all the help they can get in generating sufficient income, which is why I always keep an eye out for the best income-producing investments available. And I've got one that's perfect for the equity portion of their portfolios.

One thing that makes this stock so right for retirees is its safety factor. Typically, it's 76% less volatile than the market. So if the market corrects by 10%, this stock might only fall 2% or so.

In general, to get a sense of a stock's safety, I like to see how it did in 2008, a terrible year in which the broader market took a nasty 37% tumble thanks to the financial crisis.

However, my ideal retirement stock was up 9.5% that year. With dividends, it posted a total return of 12.2%.

I'm referring to General Mills (GIS), a well-known global leader in packaged foods and one of the best options available to retirees seeking solid investment income.

Its great showing in 2008 notwithstanding, GIS isn't likely to deliver fast growth at this point in its long history. But retirees should appreciate the firm's steady upward trends in sales, earnings and cash flows, as well as its consistently strong margins in an industry where margins can be wafer-thin. This sort of reliability is exactly what has made GIS a great income stock with uninterrupted dividends for 115 years.

Here's a snapshot of GIS's recent performance.
Some quick math shows the firm raised its dividend 15.7% a year since 2008 to the current $1.64 per share. With the stock price around $53, that's good for a 3.1% yield. And I expect the yield to remain in that range for the foreseeable future based on past and projected growth rates.

Again, though, don't look for the explosive (but very volatile) expansion you might get from a small- or mid-cap stock. From GIS, I'd watch for steady, sustainable revenue and earnings growth rates of more like 6% and 7%, respectively, during the next five years without a whole lot of variation from those averages.

Such growth will come from things like dominance of the ready-to-eat cereal market, where GIS is the second-largest player and has many well-known brands such as Cheerios, Chex, Wheaties, Kix and others.

General Mills also owns 40% of the ready-to-serve soup market, mainly on the strength of its Progresso brand. It's also a leader in refrigerated dough and baking items, snacks, ice cream and yogurt, boasting top brands such as Betty Crocker, Pillsbury, Haagen-Dazs and Yoplait.

Management knows the firm will have to evolve to stay profitable and protect market share from cheaper private-label competition. Later this year, for instance, it plans to launch a variety of new products reflecting consumers' desire for a healthier diet with adequate fiber and protein.

Popular brands will be heavily leveraged to maximize the success of such products, which will include vegetable chips, gluten-free cereals, breakfast biscuits, and fruit and nut bars among other things.

Another major catalyst for GIS will be an even greater focus on international operations, which currently account for 29% of revenue and have spiked 81% since 2011 to the current $5.2 billion. The bulk of foreign sales ($3.4 billion) take place in Europe and Canada, though the portion contributed by emerging markets like Asia, Latin America and Eastern Europe could soon equal and eventually well surpass this since those are likely to be the areas of greatest opportunity.

An important part of General Mills' international growth has been a longstanding 50-50 partnership with global food and beverage giant Nestle (NSRGY).

The partnership, which contributes $1.1 billion to the top line and has expanded into 130 countries, should be a big advantage going forward because of Nestle's expertise with local emerging markets. General Mills will be able to use Nestle's knowledge to minimize the uncertainty of international expansion as it seeks partnerships with (or buyouts of) the best local companies.

Risks to consider:
GIS could display weakness in the near term if rising input costs prompt higher prices that would weigh on sales volumes. This could develop into a longer-term issue if input costs rapidly shoot up.

Action to take:
Fortunately, the unprecedented double-digit input cost increases of the past few years appear to be subsiding. So I project that any weakness in GIS's financial and stock performance will be temporary. Indeed, I'd take it as an opportunity to buy a stock every retiree should own for its reliable growth, low volatility and solid dividends.

With a bottom line that's projected to climb about 7% a year, GIS' earnings per share (currently $2.73) could hit $3.85 in five years. Based on forecasts for its earnings multiple to average around 18 during that time, the stock may climb 30% to $69 from the recent price of $53. Assuming GIS maintains its 54% payout ratio, its dividend would rise to $2.08 in five years, for a projected yield of 3% at that time. Thus, total returns from the stock could average more than 8% a year from now to mid-2019.

Tim Begany does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.


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28Comments
May 2, 2014 11:52AM
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One of many great dividend paying companies that have a history of increasing dividends each year. If you bought 300 shares in January, 1990 (Total cost: $22,000) you would now own 2,400 shares through stock splits and would be receiving $3,946 in dividends this year. Total dividends received on the original investment aggregate to $24,000 and the current annual dividend yield on the original investment is just shy of 18%. 
May 2, 2014 10:57AM
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Folks, folks, folks, if Wall Street believed this jobs report we would be up triple digits and counting; Wall Street looks at this number with plenty of skepticism plus, the labor participation numbers were awful so, we are in the red again fighting to return to the flat line....Face it, job creation is substandard, in other words, it sucks. Like we always tell you, this administration can fool the low information voters out there, they cant fool Wall Street...We will keep trying to get back in the green this afternoon....Don't forget its Friday...More later.
May 2, 2014 10:41AM
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Great idea, except... not for me. I've chosen a Vanguard Tax Free muni fund and a Powershares CA muni ETF, Both have close to the same amount of investment income before I account for the tax savings, for me the net income after taxes in retirement is important. I'm not looking to grow my share of a stock or fund, I'm looking for supplemental income to my SSA and Pension. It is allowing me to keep my 401K and IRA monies in place and growing until I am required to make withdrawals.
May 2, 2014 12:11PM
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General Mills - proof that buy and hold still works when your dealing with a well run company.

General Economy - 1st quarter was terrible, the bad winter played some role, 2nd quarter already looks like it will be strong, unleashing pent up demand from 1st quarter.  It will average out to about 1.8 to 2% growth, that's my guess anyway.  Nothing to right home about.  To me the 3rd quarter will tell a more important tale as it will indicate whether or not the economy has any momentum or not.

The Fed - will not raise rates until 2015 period.
May 2, 2014 2:37PM
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They could make a ton if they would come out with low sodium products for all the baby boomers and oldsters now. Why they think they need to put so much salt in everything is beyond me.
May 2, 2014 10:38AM
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Nope. With the obesity rates in the USSA, the functionally illiterate dim voters will eventually turn to NATURAL cereals (like oatmeal with blueberriesl, etc).  A fraction of the cost and actually good for you.
May 5, 2014 9:15AM
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Monday morning and no surprises at all, manipulators continuing what they started on Friday....Now they can use several excuses, China, Ukraine, we know the economy is still weak....Doesn't matter, the thing is to bring these markets down so they can make lots of dough....Will not be a pretty one folks, a perfect day to stay in the sidelines and watch these crooks do their thing....One thing is constant down here, cheaters will never go away....More some time after the opening bell.
May 3, 2014 5:35PM
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@Bill in Omaha:  I work 3 miles from General Mills headquarters.  It's not fancy at all.  Just a normal glass commercial building in Minneapolis.  None of your REIT, MLP dividends are "qualified" dividends.  You pay taxes at your highest bracket on that income.  And your MLP will nail you with a big ordinary income when you sell because most of the distributions you get every year are simply return of cost basis
May 2, 2014 12:14PM
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CGT....NEEDS to read a couple of the comments or "latter replies" under his blabber...


THEN and ONLY THEN, might he understand more about the Markets and the Economy..

May 3, 2014 12:00AM
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I for one believe that retirees should be sitting back enjoying last years good earnings and forgetting the market for some time to come.
May 2, 2014 4:13PM
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Another excellent thing about General Mills, especially if you would prefer to make many small purchases over time, is that is has a no-purchase-fee DRIP that is administered by Wells Fargos' shareowneronline.com.  There is also no dividend reinvestment fee if you choose to reinvest them.

You pay a $15 enrollment fee (NO prior GIS stock ownership is required) and make an initial minimum investment of either $250 or five automatic $50 monthly purchases you set up with your checking account (that $250 includes the setup fee).  Selling stock is $15 plus 12 cents/share.  The enrollment and sales fees are higher than a typical online brokerage -who usually also reinvest dividends for free, so the DRIP plan is most valuable to those who make many small buys and don't want trading commissions to eat up too much of it.

I buy GIS shares automatically each month so I save almost $119.88 per year in trading commissions.  Additionally, I also get the advantage of dollar-cost-average rather than saving up money at low bank interest until I have enough to make brokerage commissions small enough to bear.  Because I invest the same amount each month, when the price is high I automatically buy fewer shares and when the price is low I automatically buy more shares, so my avg. price per share is LESS than the average price of the stock over the period in which I'm buying.

May 2, 2014 1:52PM
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We heard the World Economic Mongers may come up The Mountain again soon; to tweak the Financial Ogee Curve. They bring lots of Money, Booze and Girls. They ask us what do we think and we have to Sign back because we don't know all that Speak. We hope they will wait until after we harvest the potatoes.
May 3, 2014 1:18PM
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Thank you, but NO!  A 3.1% yield --- don't make me retch!  I invest in ONLY BDC, REIT, and MLP stocks that pay me an AVERAGE annual dividend return of over 10%.  That yield, compounded for those 24 same years on that same $22,000 investment in 1990, would give me a portfolio of almost $217,000 today!  That, of course, assumes that I wouldn't have panicked in some of the down years.

 

Folks, buy and hold is definitely the way to go, but at much higher yield rates than 3.1% AND with fortitude and patience.  Make them pay you to own them;  not their management teams and not the big fancy headquarters buildings.  

May 2, 2014 12:27PM
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Eat mo' sprouts and seeds....sure...;)
May 2, 2014 5:24PM
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I guess every retiree should try to profit from GIS since they are a major producer of health issues. 

What a business model:  Produce various snacks which are all variations of artificially flavored hydrogenated high-fructose corn syrup coated genetically modified corn and potatoes.   Then spend the big gross-margins on advertising to anesthetize and distract the public to eat with pure emotion.
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