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General Mills’ Cash Flow Increases The Safety Of Its Dividend Yield

13 new stocks make the Safest Dividend Yields Model Portfolio this month, which was made available to members on February 18, 2021.

Recap from January’s Picks

On a price return basis, the Safest Dividend Yields Model Portfolio (+4.2%) outperformed the S&P 500 (+2.1%) by 2.1% from January 21, 2021 through February 16, 2021. On a total return basis, the Model Portfolio (+4.4%) outperformed the S&P 500 (+2.1%) by 2.3% over the same time. The best performing large cap stock was up 13%, and the best performing small cap stock was up 19%. Overall, nine out of the 20 Safest Dividend Yield stocks outperformed their respective benchmarks (S&P 500 and Russell 2000) from January 21, 2021 through February 16, 2021.

More reliable & proprietary fundamental data, proven in The Journal of Financial Economics, drives my firm’s research. My firm’s proprietary Robo-Analyst technology[1] scales forensic accounting expertise (featured in Barron’s) across thousands of stocks[2] to produce an unrivaled database of fundamental data.

This Model Portfolio only includes stocks that earn an attractive or very attractive rating, have positive free cash flow and economic earnings, and offer a dividend yield greater than 3%. Companies with strong free cash flow provide higher quality and safer dividend yields because I know they have the cash to support the dividend. I think this portfolio provides a uniquely well-screened group of stocks that can help clients outperform.

Featured Stock for February: General Mills, Inc.
GIS

General Mills, Inc. is the featured stock in February’s Safest Dividend Yields Model Portfolio.

General Mills has grown revenue by 4% compounded annually and net operating profit after tax (NOPAT) by 8% compounded annually since 2017. General Mills’ NOPAT margin increased from 13% in 2017 to 15% over the trailing-twelve-months (TTM), while its return on invested capital (ROIC) improved from 9.0% to 9.3% over the same time.

The firm’s economic earnings, or the true cash flows of the business, rose from $1.2 billion in 2017 to $1.9 billion TTM.

Figure 1: General Mills’ Revenue & NOPAT Since 2017

Cash Flow Supports Dividend Payments

General Mills has paid a dividend for 120 consecutive years. The firm increased its dividend payments from $1.78/share in 2016 to $1.96/share in 2020, or 2% compounded annually. The current quarterly dividend, when annualized provides a 3.6% dividend yield.

In 2018, General Mills acquired Blue Buffalo Pet Products for ~$8 billion, which contributed to the firm’s -$6.2 billion free cash flow (FCF) that year. Going forward, General Mills’ dividend payment is supported by the firm’s strong free cash flow, which has improved from $2 billion in 2017 (the year before the acquisition) to $3.3 billion TTM. Over the past two years, General Mills generated $6 billion (17% of current market cap) in FCF while paying $2.4 billion in dividends, per Figure 2. Over the TTM, General Mills generated $2 billion more in FCF than it paid in dividends.

Figure 2: General Mills’ FCF vs. Dividends Since 2016

*Impacted by the $8 billion Blue Buffalo acquisition

Companies with strong FCF provide higher quality dividend yields because I know the firm has the cash to support its dividend. On the other hand, dividends from companies with low or negative FCF cannot be trusted as much because the company may not be able to sustain paying dividends.

GIS Is Undervalued

At its current price of $56/share, GIS has a price-to-economic book value (PEBV) ratio of 0.4. This ratio means the market expects General Mills’ NOPAT to permanently decline by 60%. This expectation seems overly pessimistic given that General Mills has grown NOPAT by 6% compounded annually over the past five years and 4% compounded annually over the past decade.

Even if General Mills’ NOPAT margin falls to 11% (ten-year low, vs. 15% TTM) and the firm grows revenue by just 0.5% compounded annually over the next decade, the stock is worth $92/share today – a 64% upside. In this scenario, General Mills’ NOPAT falls by 3% compounded annually over the next ten years. See the math behind this reverse DCF scenario.

Critical Details Found in Financial Filings by My Firm’s Robo-Analyst Technology

Fact: my firm provides superior fundamental data and earnings models – unrivaled in the world.

Proof: Core Earnings: New Data & Evidence, forthcoming in The Journal of Financial Economics.

Below are specifics on the adjustments I make based on Robo-Analyst findings in General Mills’ 10-Q’s and 10-K:

Income Statement: I made $812 million of adjustments with a net effect of removing $372 million in non-operating expenses (2% of revenue). See all adjustments made to General Mills’ income statement here.

Balance Sheet: I made $8.1 billion of adjustments to calculate invested capital with a net increase of $6.4 billion. The most notable adjustment was $2.9 billion (13% of reported net assets) in other comprehensive income. See all adjustments to General Mills’ balance sheet here.

Valuation: I made $21 billion of adjustments with a net effect of decreasing shareholder value by $17.7 billion. Apart from total debt, one of the most notable adjustments to shareholder value was $1.9 billion in deferred tax liabilities. This adjustment represents 6% of General Mills’ market value. See all adjustments to General Mills’ valuation here.

Disclosure: David Trainer, Kyle Guske II, and Matt Shuler receive no compensation to write about any specific stock, style, or theme.

[1] Harvard Business School features my firm’s research automation technology in the case Disrupting Fundamental Analysis with Robo-Analysts.

[2] See how my firm’s models overcome flaws in Bloomberg and Capital IQ’s (SPGI) analytics in the detailed appendix of this paper.

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