Low cash flows, a changing retail landscape, and changing TV viewing habits could doom General Mills Inc. (NYSE: GIS).
The cereal maker reported an operating cash flow of $884.5 million, a net income of $591.4 million, and an ending cash flow for the quarter that ended on 30 November 2019. However, General Mills’ quarterly operating cash flow grew from $572.10 million on 31 August 2019 to $884.50 million on 30 November 2019.
Thus, General Mills generates tiny amounts of cash from its cereal sales. Breakfast cereal; on the other hand, is still a popular and lucrative product. Statista estimates the average American consumed 6.5 kilograms of breakfast cereal in 2019.
Can General Mills Make money from Breakfast Cereals?
Furthermore, the average revenue per person in the breakfast cereal business grew by 2.1% to $47.42 billion in 2019, Statista estimates.
Conversely, General Mills’ revenues grew by just 0.22% during the last quarter. In addition, General Mills’ revenues shrank by -2.23% in the quarter ending on 31 August 2019.
Hence, Generals’ Mills market share could be shrinking. However, General Mills still makes four of the top 10 breakfast cereals in the United States, MTO News reports. Those cereals are Cheerios, Honey Nut Cheerios, Lucky Charms, and Cinnamon Toast Crunch.
Thus, General Mills (NYSE: GIS) owns a strong stable of brands. That also includes Wheaties, Fiber One, Chex, Kix, Cascadian Farm, Total, and Trix. Other strong brands at General Mills include; Pillsbury, Haagen-Dazs, Annies, Liberte, Muir Glenn, Food Should Taste Good, Bugles, Gardetto’s, Nature Valley, Progresso soups, Green Giant, and Yoplait.
General Mills Exposure to the Grocery Business
Consequently, General Mills has a heavy exposure to the retail apocalypse in the grocery business.
For example, General Mills depends on grocers such as Kroger (NYSE: KR) to deliver its products to consumers. Notably, Kroger reported a quarterly revenue growth of 0.51% on 31 October 2019.
Hence, General Mills could lose revenue each time a customer starts buying groceries from Instacart or Amazon Prime. To explain, a consumer that wants to switch from Cinnamon Toast Crunch to a cheaper or healthier brand of cereal can do so with one click at Instacart.
However, the same customer could impulse buy Cinnamon Toast Crunch at Kroger’s or Safeway. In particular, General Mills could lose its most potent advertising tool the supermarket shelves. To explain many people buy comfort food such as cereal because they see it on the supermarket shelves.
Currently, Gallup estimated 11% of Americans say they order groceries online each month in August 2019. In contrast, Gallup estimates 89% of Americans still do not order groceries online. Plus, 19% of Americans tell Gallup they pick up groceries they order online.
How Amazon could Threaten General Mills
Online grocery shopping could explode because 57% of Americans told Consumer Intelligence Research Partners they shop on Amazon (NASDAQ: AMZN) in July 2019.
Additionally, the number of American households with an Amazon membership grew from 101 million in January 2019 to 105 million in July 2019, Consumer Intelligence Research Partners estimates. In addition, Digital Commerce 360 claims 82% of America’s 127 million households had a Prime Membership in July 2019.
Amazon Prime’s popularity is problematic for companies such as General Mills that depend on legacy brands. To clarify, most of General Mills’ customers conduct a large percentage of their shopping on platform General Mills has little control over.
In addition, fewer and fewer Americans are watching the commercials General Mills relies on to promote its products. For example, TechCrunch claims just 14% of US households watched over the air TV in May 2018. In detail, just 16 million of America’s 127 million households were watching broadcast TV in May 2018.
Why Americans no Longer See General Mills’ Advertising
On the positive side, Nielsen estimates the percentage of US households that could watch broadcast television grew from 9% in May 2009 to 14% in May 2018. On the negative side, many of those households have switched from cable or satellite TV to streaming video.
AT&T (NYSE: T) admits its DirectTV and U-Verse television subscription businesses lost 1.2 million subscribers in 3rd Quarter 2019, Market Mad House claims. Meanwhile, Statista estimates Netflix had 60.62 million paid subscribers in the United States in 3rd Quarter 2019.
Thus most Americans now get much or most their video entertainment from commercial-free streaming video. Consequently, General Mills could have no way to advertise its products to tens of millions of American households. For instance, there could now be millions of kids who have never seen the Lucky Charms Leprechaun.
Under those circumstances, millions of Americans will have little brand loyalty to General Mills. Instead, of Cheerios, those consumers will reach for; or order, the cheapest cereal see they see. One effect of this development is that Americans are eating more cereal than ever, but buying fewer boxes Cheerios and Wheaties.
Is General Mills Making Money?
General Mills (NYSE: GIS) is still making money; however. Generals’ reported a quarterly gross profit of $1.329 billion on 31 August 2019 to $1.569 billion on 30 November 2019.
In addition, General Mills reported quarterly revenues of $4.421 billion on 30 November 2019. Those revenues grew from $4.003 billion on 31 August 2019.
Furthermore, General Mills’ quarterly operating income grew from $662.4 million in August 2019 to $811.2 million in November 2019. Plus, General Mills’ income after tax grew from $506.7 million in August 2019 to $566.5 million in November 2019.
General Mills is making more money but keeping a little of that money. General Mills had $560.20 million in cash and short-term investments on 30 November 2019. That number grew from $504.8 million on 31 August 2019.
Therefore, General Mills makes money despite the incredible disruption of both the retail and television industries. That will lead many people to call General Mills a value investment.
Is General Mills a Value Investment?
I think Mr. Market overpriced General Mills at $52.21 on 2 January 2020. I call General Mills overpriced because of the low cash flow it reports.
Yet General Mills stock offers some income. General Mills will pay a dividend of a 49₵ on 9 January 2019. Impressively, General Mills has paid a dividend for 15 years. Overall, a share of General Mills offered a 3.69% dividend yield, an annualized payout of $1.96, and a payout ratio of 60.87% on 2 January 2020, Dividend.com reports.
In the final analysis, General Mills (NYSE: GIS) is a good dividend stock with no value characteristics. Shareholders could make money from General Mills, but owners of this stock will take huge risks in today’s changing business environment.