DEAR MR. BERKO: What is your opinion of General Mills? The stock has moved up 20 percent since Warren Buffett took over Heinz. Do you think Buffett also will make a play for General Mills? Do you think another player will take over the stock? I'll buy 500 shares if you think there's a good chance that it is a takeover target. What do you think a good takeover price would be if it were to happen?
TJ, Jonesboro, Ark.
DEAR TJ: If General Mills were to be bought out, I think a good takeover price would be about $185 to $235 a share. And I'm certain as can be that most shareholders would welcome that price. You and lots of other stupids think alike. I am sure Warren Buffett has his hands full with Heinz and doubt he has an interest in General Mills other than his daily breakfast of Lucky Charms or Cinnamon Toast Crunch.
General Mills (GIS-$49.12) is Betty Crocker, Bisquick, Cheerios, Gold Medal flour, Green Giant, Haagen-Dazs, Hamburger Helper, Nature Valley, Pillsbury, Progresso, Wheaties, Yoplait and other delectable, devilishly delightful consumables that put $16.5 billion of revenue on the 2012 income statement. As an investment, this company is a no-brainer.
The CEO makes only $2.9 million; the CFO makes $1.3 million; and those in management appear infinitely more interested in growing their company than they are in growing their egos. Because there are only three lawyers and no congressmen on the board of directors, there are no union troubles or lawsuits for fraud, unfair competition, product dumping, false advertising, insider trading, kickbacks or tax problems.
GIS is a clean company, an American icon that produces good products, and those products produce solid long-term results for shareholders. The company has a clean balance sheet, a fine income statement and good valuation ratios. But if you are in a hedge fund hurry, seeking an angle or hoping to buy low and sell high, GIS will bore you to tears.
However, this reliable pale blue chip company, which began selling Gold Medal flour in 1880, will fit like a comfortable slipper in the long-term growth portfolios of intelligent investors.
In the past decade, GIS steadily has improved revenues from $7.8 billion to $16.6 billion, grown earnings from 85 cents to $2.51 a share and increased the dividend from 55 cents to $1.22, and its book value has gone from $4.87 to $9.95.
This growth was planned and orderly, and it was aided by uncommonly solid product development with high-level, sophisticated market research. This year, GIS will introduce almost 100 new products, and their debuts are quite likely to be enormously successful, a result of smartly ramped-up marketing, good advertising and effective couponing. Management has written the textbook in this field. In the coming four years, revenues should top $21 billion; earnings could grow to $3.65 a share; net profit margins may exceed 11.5 percent; and the dividend could rise to $1.70.
For investors who believe the current “rah-rah, go-go” market is too volatile and prefer investment dependability in their long-term plans, GIS could be an excellent selection. As investors realize that market volatility can be counterproductive, that today's risks are too difficult to manage and that results are temporary, GIS will come to be a more attractive investment.
Kendall Powell was appointed CEO in 2007, after 25 years in the trenches with GIS. He is the quintessential manager and moves smoothly among company bankers, the board, management, marketing, distribution and the factory floor, where he learned some of the ropes. He's mindful that GIS' future depends on growing its market share. Powell will continue to demand new products from research and development and will seek expansion opportunities to acquire complementary products. Powell, by the way, owns 447,000 shares, and like too few CEOs, he earned those shares based on solid and lasting performance.
Though I like the stock and think it could trade in the $80s in the coming five to six years, I feel the current $49 price tag is too high. I believe $41 to $43 is a fair entry point for long-term investors.
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at firstname.lastname@example.org.