In theory, the market is efficient. It takes all known information and uses it to determine the right price for stocks. In reality, things are different. Investors make more emotional than rational decisions. As a result, equities are not valued correctly in the short term. For long-term income investors in search of good dividend stocks, it may be worthwhile to look for these short-term mismanagements. At the moment, General Mills seem to be an unpopular dividend stock to look at.
General Mills earns money from packaged food. However, this market has recently become rather unpopular. The main reason for this is that more and more customers prefer foods that make them healthier and fresh. And if that were not enough, General Mills has made some notable mistakes. One of them was to oversleep the hype about Greek yogurt. As a result, General Mills’ Yoplait brand dropped from second to third place.
This partly explains why the stock currently has a dividend yield of 43%. That’s the highest value in decades. Another reason is that General Mills has just completed a very large and expensive acquisition. Buying companies is nothing new to the food producer. This has been done for years to reorient the business. For example, Annie’s and Larabar have been acquired to strengthen their presence in healthy areas, which are now more favored by consumers. Both acquisitions have paid off so far, but had little influence on the result. However, the latest takeover is of a different caliber. It cost a respectable $8 billion and allows General Mills to enter a new market: animal feed.
That’s possible, but investors should not get lost in the details. It is clear that the debts will be noticeable in the short term. Interest expense increased 84% year-on-year in the first fiscal quarter. But the interest earned was almost 4.5 times higher in the same quarter. This gives the company plenty of scope to handle the additional costs of the acquisition. And Blue Buffalo continues to grow, backed by the broad reach of General Mills distribution network. The most likely scenario is that General Mills, which sells basic consumer products to many end customers, keeps the dividend constant until the balance sheet improves again. The latest results indicate that the rest of the company is back on track.
