Update: This post originally covered a 25-year investment case study of General Mills. Since I am publishing it a few days into the new year, we can look at an additional year of data (all of fiscal 2012) so I modified the figures and compound annual growth rates to account for that extra year, stretching the case study to present day. It might not be as symmetrical but I had planned on publishing this last year.
Last month, I mentioned General Mills in one of my posts. My extended family was over the other day and we were in the kitchen discussing portfolio management. My brother-in-law asked, “Why would anyone buy General Mills?”, when talking about stocks that have what appear to be lower growth and don’t fluctuate all that often. If you were to have opened the newspaper at any time in the past quarter century, General Mills shares would have been stuck between $25 and $75 per share.
[mainbodyad]It’s a good question. General Mills does look boring. It sends a significant portion of the cash it generates each year back to owners in the form of dividends and stock buy backs. It hardly ever generates a story that is important enough to nudge the stock price one way or another. You never see exciting profiles of General Mills in the financial press, or come across interviews with young entrepreneurs who made millions overnight by owning General Mills shares.
Looks are deceiving. It’s better to show, rather than tell, so let’s go back in time 26 years. (I consider an “investing lifetime” to be roughly 50 years, so this period covers half of an investing lifetime and is certainly long enough to have smoothed out the year-to-year vicissitudes common to the stock market.)
What Would Have Happened If You Invested $100,000 In General Mill Shares 26 Years Ago?
Imagine it is the first trading day of 1987. You have $100,000 you want to invest. You decide to buy an ownership stake in General Mills. The stock closed at $29.93 per share. After paying a small commission, you end up with 3,340 shares of the company. You park the stock certificates in a bank vault and ignore them for the next 26 years.
You wake up this morning and decide to go down and take a peak into the vault. What do you have?
- 26,720 shares of General Mills with a market value of $1,102,734
- 10,020 shares of Darden Restaurants with a market value of $454,006
- Cash dividends from your General Mill shares of $466,264
- Cash dividends from your Darden Restaurants shares of $75,082
- Grand Total: $2,098,086
Instead of owning shares of one company, you own shares of two. General Mills spun-off its restaurant division to stockholders by mailing them shares of Darden Restaurants. Darden is the company that owns and operates Red Lobster and The Olive Garden.
Equally as exciting as the $1,556,740 worth of stock you are holding and the $541,346 in cash that has been mailed to you, in fiscal 2013, you should collect at least $55,310 in new cash dividends ($35,270 from General Mills and $20,040 from Darden Restaurants). To put that into perspective, you are now collecting more in passive income each year than the median American family earns with two adults active in the work force.
Your original 3,340 shares would have grown into 26,720 shares of General Mills, 10,020 shares of Darden Restaurants, and $541,346 in cash dividends along the way, all without adding a single extra penny to your initial investment.
Had you reinvested those dividends, you would have made much more money. Even if you didn’t, $541,346 is a lot of cash to enjoy. New cars, vacations, home renovations, college educations for your children … all without touching principal.
A good business, as the saying goes, is the gift that keeps on giving. It showers you with money. That has certainly proven true for General Mills. As people around the world bought Cheerios, Wheaties, and Cinnamon Toast Crunch, baked Betty Crocker cakes, had Pillsbury cinnamon rolls, snacked on Yoplait yogurt, ate Green Giant vegetables, ordered the Tour of Italy, or enjoyed cheddar biscuits with lobster, that money was finding its way into your pocketbook.
General Mills Grew Your Real Purchasing Power By Almost 10% Compounded Annually
General Mills, without reinvesting dividends, gave you a compound annual growth rate of 12.42% before taxes. During that same period, inflation increased 2.87% compounded annually. That means your real purchasing power expanded by 9.55% compounded annually before taxes.
For an asset that required you to do virtually nothing from the moment you signed the check to acquire it, that is the best outcome you have a right to expect. You did nothing for 26 years. You did not show up to an office. You did not work late to come up with new packaging for a product launch. You did not have to cosign business debt. You just owned a piece of the corporate pie.
General Mills owns a portfolio of some of the most iconic food brands in the world. Pillsbury, Chex Mix, Cheerios, Cocoa Puffs, Fiber One, Trix, Old El Paso, Hamburger Helper, Green Giant, Lucky Charms … the list is huge.
Despite this gusher of wealth that has showered down on your family, if you look at General Mill’s stock price, it appears as if it has barely moved in twenty six years. The stock traded for $29.93 back then and for $41.27 today. However, this doesn’t reflect the fact that the company split its stock, sending you more shares. It doesn’t reflect the fact that the company sent out most of the profit in the form of cash dividends. It doesn’t reflect the fact that the firm broke itself into two and mailed you certificates for your ownership of the restaurant division.
You cannot look at the stock price alone. It doesn’t tell you what you need to know in most cases unless 1.) a company refuses to split its stock, 2.) the company doesn’t pay cash dividends, and 3.) the company doesn’t spin-off any holdings. Very few businesses pass all three tests. One famous example is Apple Inc., which only recently began paying a dividend. The company went from around $7 per share in 2003 to $525 per share today. Another example is Berkshire Hathaway, which rose from $8 a share back in the 1960’s to $141,000 per share today. While you should have some firms like that in your portfolio, they are going to be a minority of your equity positions. Most companies don’t behave that way due to the twin combination of the cash expectations of owners and saturation of an existing (albeit, lucrative) market.
The Returns for General Mills Were Good Because the Initial Price Was Reasonable Relative to Earnings and Growth
When you bought your stock in 1987, you only had the previous year’s results to consider, which indicated that General Mills generated a net income of $222 million, or $2.50 per share (adjusting for splits, this is equal to $0.3125 per share today). Compared to your purchase price of $29.93, this meant you were getting an 8.35% earnings yield. At the same time, the 30-year United States Treasury bond was yielding less than 8%.
When you bought your stake, you had look-through earnings of $8,350 (3,340 shares x $2.50 per share in profit). Today, you have look-through earnings of $107,481 ($72,411 of which come from General Mills and $35,070 of which come from Darden Restaurants).
Your look-through earnings increased by 1,287%, or 10.33% compounded annually.
With the benefit of hindsight, we now know the choice you faced in 1987 was to use your $100,000 to make one of two investments:
- Buy a $100,000 30-year United States Treasury bond and collect $8,000 per year, a figure which would never increase or decrease
- Buy a $100,000 ownership stake in General Mills and collect look-through earnings of $8,350 in the first year, increasing by an average of 10.76% thereafter
Of course, at the time, you didn’t know what the growth rate attached to the earnings yield was going to be. That is where the art and discipline of analysis comes into the picture. You have to look at product lines, market share, management teams, tax laws, inflation rates, and a host of other factors. It’s not hard to see, though, that the price paid in 1987 was very fair.
Had you bought the Treasury bond, you would have $100,000 in future claim, which you will receive in 5 years when maturity is reached, and you would have collected $200,000 in interest income.
[mainbodyad]There is a significant difference between turning $100,000 into $300,000 and turning that same amount into nearly $2,100,000. The cost was dealing with the emotional pain of watching your holdings fluctuate in value as other investors bid amongst themselves as to what they were willing to pay for an ownership piece of General Mills.
The Lessons You Should Learn About Portfolio Management from Examining General Mills
Risk is not defined by an asset fluctuating in price. Risk is defined by losing purchasing power. Even if you had split your original $100,000 between General Mills and a company that crashed and burned, such as Enron, you would have still ended up with around $1,050,000 despite one of your two holdings going bankrupt. That is a failure rate of 50%. Regardless, you’d have still walked away with almost a million dollars in profit.
Follow the three rules:
- Pay a rational price relative to earnings and growth.
- Buy a diversified collection of assets that throw off a lot of cash for you to spend, reinvest, give to charity, or save so that if one or more fails, the rest remain unharmed and can restore the damage.
- Hold your ownership in the most tax-efficient way possible.
Time does the rest. Sometimes, the world goes to hell, like you saw during the Great Depression, but if you avoid using debt and always keep enough liquidity on hand to feed your family, you should be fine. Otherwise, too bad. The world isn’t fair. Things don’t always work out as they should. The best you can do is act rationally so that you increase the probability of outcomes that you find favorable.
Don’t forget to pay attention to businesses like General Mills. It can be a temptation to skip over them when looking through list of potential new holdings for your portfolio. They never seem to do anything, causing impatient investors to sell their stock after a few years of seemingly non-movement. These firms are the tortoises of the finance world. While everyone else is paying attention to the hare, they just keep putting one foot in front of the other, churning out fresh cash for their owners as the majority of spectators ignore them.
Reader Comments (13)
Comments are presented chronologically, with replies indented beneath the comments to which they respond.
Joe
January 10, 2013
Wow. Great article.
Jason Spacek
January 10, 2013
Beautiful article, Josh. I kinda want to invest in General Mills right now.
Joshua Kennon
January 10, 2013
Replying to Jason Spacek
After writing it, I actually thought, "General Mills is rationally valued right now. Why don't you hold this through the KRIP?", so I picked up a few shares myself.
Mel Zurn
January 11, 2013
This article is really well done, as are your similar pieces on winning stocks like Clorox, etc. I would challenge you, though, to the possibility that many people will invest in "sure-thing" companies, only to be disappointed. General Motors bought in 1991 would have been a heart-breaker. General Electric would have been a wild ride going nowhere. Titans like US Steel, or Citigroup (and its many acquired companies and divestitures,) or Sears Roebuck, or Kodak have foundered, some permanently. I would love to see your analysis of some of these failed 50-year holdings, in order to avoid making similar mistakes.
Mel Zurn
January 11, 2013
Hi Again, just read your 2011 Kodak article, sorry for asking questions before researching the rest of your blog. I would still be interested in a 26 year treatment of GE and/or GM and the dangers of buying too high, or holding too long. Conversely, maybe a different way to phrase the question would be "At what point does the long-term investor decide to become active and sell a position?" Thanks!
fran short
January 13, 2013
Can you write more about "Hold your ownership in the most tax-efficient way possible"? I assume buying stock in companies that you expect to hold for the very-long-term is more favorable, but please inform. Perhaps you are hinting at tax-deferred retirement accounts as well.
Stable Investor
January 14, 2013
Impressive analysis of an impressive company.
It is these boring and stable companies that make long term investors famous for what they are famous for. We constantly look for such companies in emerging economies like India.
Marc
January 24, 2013
Thanks Josh for writing this piece. It's very insightful. I think looking back on the past 10 years, I really wish I'd gotten started earlier in these types of companies. I'm from Silicon Valley, so the predominant mindset very much eschews these tortoises (or perhaps snowball would be a better way to describe them) instead for the flavors of the week. They may be disruptive, but they may also be disrupted. And when they create value, it's sudden and unpredictable, and when value is destroyed, it's also equally sudden and unpredictable. Sometimes people make money, but most likely, a decade will pass and the average tech investor doesn't gain too much unless he's lucky. Meanwhile, these silent ignored blue chips crank away earnings, dividends, cash flow day in day out, without any drama, whereas everyone spends all their time fixated on the gyrations of Apple, Facebook, Google, etc.
It makes me think most of the tech industry is just a soap opera rather than a value creation machine. Now after struggling for a while, I'd much rather be able to sleep at night and live comfortably rather than be one blown design cycle away from oblivion, which is where most of the tech sector is at. Even if the economic apocalypse happens and the US is reduced to a third world country, we'll still probably be eating cereal, eating chocolate, and cleaning our kitchens with Clorox bleach. Meanwhile, our kids probably wouldn't even know what Facebook was, let alone derive any benefit from having it in their portfolios.
Katie Saves TheDay
December 17, 2013
My dad has worked for General Mills for 35+ years and I will be celebrating my 7 year anniversary on January 2nd. I have never seriously considered buying General Mills stock until I read this article. Buying stock always seemed like something I was not capable of understanding let alone doing. My dad will be so proud LOL.
I stumbled across this blog when I googled copycat cinnabon recipes (which I will be trying by the way) and I've now been reading your articles for 2 hours. I don't know what it is but for the first time in well, pretty much all of my life, I find investment and money talk interesting. Maybe I'm finally growing up but I doubt that so I'm going to credit your writing style to my peaked interest. Either way, I love your articles and I will definitely be back to read more!
Joshua Kennon
December 18, 2013
Replying to Katie Saves TheDay
Welcome to the site; glad to have you! It's funny that you commented on this older article when you did because I was across town helping my mother buy shares of General Mills for her own retirement account. I'm a big fan of the company.
I think a big part of the reason folks are scared away from investing is they don't understand that a share of stock is a piece of ownership. When you look at General Mills, what you should see is a company that sells great products ranging from Hamburger Helper to Cheerios. Last year, it brought in $17,774,000,000 in sales. After paying all of the expenses, salaries, and taxes, the owners were left with $1,855,000,000 in profit. Since the General Mills company is divided into roughly 665,600,000 "pieces", or shares, each piece of the business was entitled to $2.69 of the profits. The Board of Directors decided that, of that, they were going to mail $1.32 per share out to the owner, and retain $1.37 to upgrade equipment, research new products, expand factories, or whatever else they think will help the business in the long-run.
It's a really simple thing. If you owned 1,000 shares, it means your cut of the sales came to $26,703.73. It means your cut of the profits were $2,690. It means that you collected $1,320 of this in cash and the business kept $1,370 to reinvest in future growth.
Likewise, if you owned 10,000 shares, it means your cut of the sales came to $267,037.30. It means your cut of the profits were $26,900. It means you collected $13,200 of this in cash and the business kept $13,700 to reinvest in future growth.
What's marvelous about it is this is a totally democratic process. Your share of General Mills doesn't care if you are male or female, old or young, black or white, Christian or atheist, gay or straight, conservative or liberal ... it is still entitled to 1/656,600,000ths of General Mills' results for the year. If cereal profits are up, you make more money.
Instead of focusing on those numbers - how much stuff is sold and how big the profits are - investors get caught up in "the stock market", which is nothing more than a giant auction where people who want to buy or sell ownership pieces get together and try to work out a deal. In other words, they focus not on the source of wealth creation from owning General Mills - selling food and snacks - but on what other people are paying for an ownership stake at the time.
It's such a foolish way to live. Take a look back over the past 25+ years. There have been periods when General Mills shares would skyrocket or crash. There have been wars, recessions, multiple Presidential administrations, inflation, deflation, the rise of the Internet ... yet, if you owned a stake in General Mills, you collected a heck of a lot of cash. A period like 2008-2009 is a wonderful example. The stock fell by almost half as people tried to liquidate whatever they could during the recession, yet the profits and dividends at General Mills were increasing! Far from being upset, even if your account statement had fallen by half, this is a cause for celebration. It means you could buy even more ownership for a cheaper price if you wanted to increase your stake in the firm so you got to keep more of the money brought in from Hagaan Daaz, Totino's, Green Giant, or Pillsbury.
I think the world would be a much better place if people focused on buying ownership in companies they understand, that produce real profits, and then sitting back and collecting their dividends. I'm looking at a table of the General Mills dividend payments dating back to 1994 as I type this and it's just a beautiful thing. No matter what happened in the stock market, that list shows you when General Mills mailed you more money. You take the number of shares you owned multiplied by the dollar amount and that's how much cash appeared in your mailbox. And because the products are so steady, this is a business that hasn't missed a dividend payment in 115 years!
That's money you can use to buy more shares of General Mills, if you want, or go out to dinner, buy movie tickets, get a new car, help pay for a college education, get a new pair of shoes, or whatever else you desire. That money showed up during stock market crashes and booms.
If you want to understand General Mills, start by reading the most recent annual report to owners (PDF). It may seem confusing at first, but highlight the parts you understand. No one is born with the ability to know what all of that means. It's a learned skill, just like riding a bicycle or learning how to talk. That's how I started - I picked up annual reports a long time ago and began to notate them as I tried to figure out what all the charts and numbers meant. It exists to tell you how the business is doing; where the money is coming from, where it is going, and how much is left for you, the owner.
P.S. Congratulations on your 7th year anniversary with the company!
billy v
July 2, 2014
I have worked for General Mills for 14 years and have read this post several times. Very well written and makes me appreciate my job even more. I am fortunate enough to be a recruiter for the company as well and I send this out to my recruits every year as a way to show them what a history of great performance can look like as an employer! Thanks again!
Stephen H
August 3, 2015
What a great read. GIS is a great company. I wish I owned it, but I understand how important valuation can be so I've been hesitant at the moment. Oh, and I ran out of cash. I think you have a problem when you spend your days at work counting down until you get enough cash saved up to go hunting for companies like GIS, HSY, MMM, etc. I just can't stop ):
Derek
August 3, 2015
Replying to Stephen H
I've had that problem as well. Nice list of good companies, a little short on funds. I was able to start a small position in GIS a couple years ago at a reasonable but not great valuation. I've found I pay more attention to companies when they're in my portfolio, so I try to take a small position if the price isn't exorbitant and wait for the fire sale to add to the position. I really like GIS over the long run.