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General Mills Shining Quarter Reveals Thrifty Consumer

Posted: Jul 03, 2009 10:50 AM by Sham Gad

Tickers in this Article: KFT, K, KR, GIS

General Mills' (NYSE:GIS) fourth-quarter earnings results continued to provide further proof that the recession is having lasting effects on the U.S. consumer. The company reported that 2009 fourth-quarter profits were up over 100% to $1.07, up from $0.53 a year ago. Excluding items such as hedging gains and losses, EPS was still a very solid 86 cents. This is the type of growth that you find in nimble small cap companies, not an $18.4 billion behemoth.

Consumers Are Changing
It's not surprising that companies like General Mills are doing well in this economic environment. It's more affordable for consumers to eat via the grocery store than to dine out. But it is interesting to see such strong numbers from these blue chip companies. (For more, see A Guide To Consumer Staples)

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U.S. consumers are responding very quickly and aggressively to the economic effects of the recession. Last week Kroger (NYSE:KR) reported that its first-quarter profit grew by 12.7%, also beating analysts' expectations. Last week also gave us the news that the U.S. savings rate had soared to 6.9%, a 15-year high. Less than three years ago, the U.S. savings rate was negative.

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Adding It All Up
There's an old saying that goes something like "the chains of habit are too weak to be felt until they are too strong to be broken." Though that saying is usually applied to negative habits, it seems to apply here.

Consumers' habits are dramatically shifting from those of casual spending to frugality. And once this deep appreciation for frugality sinks in, those habits may be tough to let go. Don't just take my word for it; the numbers say it all.

That's why I favor excellent businesses like Kraft (NYSE:KFT), which, like General Mills, sells a lot of the items that are found on the grocery store shelf. Kraft should also benefit from this environment and at today's prices, you're getting a 4.5% dividend yield. This yields beats General Mills 3.1% yield and that of food company, Kellogg (NYSE:K), currently at 2.9%. In addition, Kraft’s P/E of 12.7 is less than 15.5 for Kellogg and 17.2 being assigned to General Mills. (For more, see Recession-Proof Your Portfolio.)

The Bottom Line
Regardless of what happens to the economy over the next year or so, U.S. consumer behavior is showing signs of a major adjustment away from frivolous expenditures and towards the basics. Coupled with attractive dividend yields, businesses like Kraft can offer comfort to the most conservative of investors. (For related reading, see Where Top Down Meets Bottom Up.)

By Sham Gad

Sham Gad is the Managing Partner of Gad Partners Fund's, value inspired investment partnerships modeled after the Buffett Partnerships of the 1950's. Previously, Gad ran the Gad Investment Group and delivered annualized returns of 22% from 2002 to 2005. Gad is also the author of "The Business of Value Investing" which will be out in the fall of 2009. Gad earned his MBA at the University of Georgia in May of 2007. Gad runs a value investing blog. He can also be reached by visiting the Gad Partners Funds site. When not writing or analyzing businesses, Gad enjoys hanging out with his wife Maggie, reading, golf, and yoga

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