Kellogg Vs General Mills Stock: Buy or Sell?

Originally posted on https://financhill.com/blog/investing/kellogg-vs-general-mills-stock-buy-or-sell

When markets crash, the baby is throw out with the bathwater. Good stocks and bad stocks all suffer. But defensive stocks have a habit of standing up to the onslaught better than most. And undervalued defensive stocks can even rise due to sector rotation away from higher risk stocks. Kellogg and General Mills fall squarely under that defensive stocks umbrella.

We’ll compare Kellogg vs General Mills in a moment but first let’s take a look a closer look at each of these stocks.

Kellogg is best-known for its cereals but it also owns dozens of other brands like Kashi and Bear Naked cereal bars, Eggo and Morningstar Farms frozen foods, Pringles, Cheez-It, Keebler, and Famous Amos.

As consumer preferences have evolved to lean more towards “healthy” snack foods and bars, Kellogg has reacted by snapping up RXBAR for a cool $600 million. Despite Kellogg embracing the “healthy” food trend, changing strategic direction on a whim is no mean feat for a corporate titan. Indeed, Kellogg has struggled to maintain its top-line revenues in recent years. Since 2015, Kellogg revenues have declined every single year.

Falling Kellogg revenues have translated to a struggling share price. Unlike the broad market indices which rose about 75% in the past five years, Kellogg is up around 15%.

Changing consumer preferences and financial struggles have not gone unnoticed by shareholders and management.

Kellogg launched Project K, a restructuring effort aimed at saving costs. And the first signs of a turnaround are already on display. Kellogg earnings were positive in the most recent quarter and management expects good sales growth going forward.

Now let’s switch gears for a moment to look at General Mills.

Like Kellogg, General Mills has dozens of brands under its corporate umbrella. Haagen-Dazs, Annie’s, Nature Valley, Lucky Charms, Cheerios, Cocoa Puffs, and Wheaties are just a small assortment of the popular breakfasts, ice-creams, and snack foods sold by GIS.

Perhaps the General Mills flagship product over the years has been Yoplait, which has been under assault by the new yogurt leader, Chobani. Sales of Yoplait have suffered as Chobani stole market share. And like Kellogg, General Mills revenues have steadily declined in recent years too, only flattening out this past year.

At first glance, General Mills looks like a stock to stay away from and it’s massive debt load of $15B, which amounts to approximately 60% of its market cap is cause for concern.

But investors who are willing to bet on the company’s strategy of selling underperforming divisions and investing in higher margin categories as part of a strategic turnaround are rewarded with a very generous 4.15% dividend in the meantime.

Both Kellogg stock and General Mills stock have been dragged through the proverbial mud in recent years. Neither has participated in the broad market rally as high fliers like Netflix, Google, Apple, and Facebook grabbed headlines. But on the horizon are signs of corporate turnarounds and sales growth. So when comparing Kellogg Vs General Mills, which is the better bet?

Both companies have similar valuations of around $25-$27 billion. And both companies specialize in consumer staples like cereals, snack foods, health bars, and ice-creams. But the similarities quickly end when scrutinizing their financials.

Kellogg has much less debt than General Mills. It has approximately $9 billion compared with $15 billion for General Mills. And while debt alone isn’t necessarily bad, it is cause for concern in a rising interest rate environment.

Perhaps General Mills would be more compelling if its dividend was significantly higher than the Kellogg’s dividend. But it’s not. Kellogg pays a dividend north of 3% which doesn’t match the 4%+ paid by General Mills – it’s nothing to sneeze at these days.

The future of General Mills is also tied to Yoplait. And Yoplait is in trouble when you look at its market share of 19% compared to 25% back in 2013. Losing over 1% market share per year signals a fiercely competitive market. It will be hard for General Mills to reclaim a lead in the yogurt industry anytime soon.

If you had to pick General Mills or Kellogg, it’s probably worth sacrificing a little yield to stick with an old stalworth company that has been around for a century and consistently proven itself through market cycles, not least by choosing to keep its debt levels in check.