Published Thu, 14 Mar 2019 12:32:06 -0400 on Seeking Alpha
Image source: General Mills Inc.'s website
By Callum Turcan
General Mills Inc. (GIS) sells everything from Lucky Charms cereal to Annie's pasta to Yoplait yogurt to Blue Buffalo pet food. As a major consumer staples company facing challenging growth prospects, a key draw for investors is General Mills' sizable 4.2% dividend yield as of this writing. While General Mills generates plenty of free cash flow, its hefty debt burden, in part a product of its $8 billion all-cash purchase of Blue Buffalo, has put dividend growth on the back burner as it focuses on its ongoing deleveraging program. In order to allocate free cash flow to debt reduction, management plans to hold General Mills' quarterly payout flat and suspended share buybacks at least through fiscal 2020.
Why Buy Blue Buffalo
The reasoning behind the Blue Buffalo purchase rests on expectations for the US pet food market continuing to grow at a decent pace going forward, which is largely a product of the ongoing trend of the "humanization of pets." Keep in mind that different entities may define the parameters of the US pet food market differently, making direct comparisons not necessarily applicable.
Statista reported that the US pet food market was worth $24.6 billion in 2016 and forecasted that this market will increase by 22% to $30.0 billion by 2022. Inkwood Research published a report that forecasted the North American pet food market will grow by 2.7% CAGR from 2018 to 2026. This narrative is... Read more