Kellogg Vs General Mills Stock: Buy or Sell?

Long-established packaged food giants like Kraft Heinz, General Mills, and Kellogg have been cornerstones in American investment portfolios for generations.

Yet the landscape today isn’t the same as yesteryears. Emerging brands featuring organic products as opposed to mass-processed food and powerful retail chains building their own white-label offerings are gnawing at their market shares.

Against this backdrop, which is best in the battle between Kellogg vs General Mills?

Warren Buffett & The Kraft Heinz Saga

Kraft joining forces with Heinz in 2015 to give birth to the $76 billion giant Kraft Heinz, controlled by none other than Warren Buffett’s Berkshire Hathaway, epitomizes the consolidation strategies deployed to counteract market pressures.

Rebuffing acquisition bids from Mondelez and Kraft Heinz, titans like Hershey and Unilever too have shown their determination to chart their own courses.

Speaking of, Mondelez is an old Buffett favorite too, and his Berkshire Hathaway holding company continues to own a stake of MDLZ in its portfolio, albeit a small one representing just 0.01% of his holdings.

Kellogg & General Mills Proven Track Records

Both Kellogg and General Mills have been consistent performers, reaping the rewards of compound interest for nearly a century.

By some estimates a $1,000 investment in General Mills at IPO would have transformed into over $20 million today. The reinvestment of the firm’s dividends is a primary reason for that growth in wealth. Currently, that dividend sits at 3.63% and has a payout ratio of 49.65%.

Compare that to Kellogg which pays out 4.04% and has a payout ratio of 93% and you’ll quickly see the extra 0.40% or so isn’t worth paying up for at Kellogg because its dividend is more at risk.

General Mills Is Acquisitive 

General Mills’ $820 million acquisition of Annie’s, an organic mac and cheese producer, has been a bright spot. Despite the initial criticism, the company successfully expanded the brand nationally.

Now, they have repeated the performance with an $8.0 billion takeover of Blue Buffalo pet food. However, these ventures have bloated the company’s debt from $9.4 billion in 2018 to an eye-popping $14.5 billion in 2019, though it has pared back to $12.0 billion in 2023.

Meanwhile, core product lines like Yoplait yogurt saw sales drop from a high of $1.398 billion in 2015 to around $900 million over the past 4 years.

Kellogg: Quiet Transformation Amid Challenges

Kellogg is contending with similar headwinds as General Mills. It underwent a comprehensive restructuring plan, known as Project K, which along with a $600 million acquisition of RXBAR, reflects Kellogg’s willingness to innovate.

The efforts appear to have paid off. Over the past year, Kellogg has reported year-over-year sales growth, and last year alone sales climbed by 8.0%. Plus, Kellogg consistently reports operating income in the $1.6 billion to $1.8 billion range, at least it has done for the past 7 years.

At present, Kellogg is carrying a more manageable long-term debt of $5.4 billion.

Which Metrics Looks Best?

From an investment standpoint, Kellogg’s debt levels are far less precarious, particularly in the wake of General Mills’ Blue Buffalo acquisition. Campbell Soup’s troubles a few years ago illustrate the dangers of leaning too heavily on debt-financed purchases.

On the product front, Kellogg’s portfolio appears better suited for modern consumer preferences. Unlike General Mills, which is still grappling with the decline of Yoplait sales, Kellogg has managed to bring stability to its cereal sales and even growth in certain segments.

But Kellogg’s dividend is arguably less sustainable, even if it is higher, because of its high payout ratio. When we examine other numbers, Kellogg has a 23.4x price-to-earnings ratio while General Mills is trading at a 14.6x multiple.

General Mills has a higher price/sales metric than Kellogg, trading at 1.9x versus 1.3x respectively. And when it comes to the all important upside potential, Kellogg has 24.9% upside to fair value of $74 while General Mills appears to have even greater potential to rise by as much as 31.7%.

Kellogg vs General Mills: Conclusion

Analysts have a $76 target on Kellogg which would translate to 16% upside. The 18 analysts covering General Mills have a $72 target on it, which would also equate to a 16% upside move. 

With similar valuation climbs on the horizon, we turn our attention to the dividend, which appears to favor General Mills given its higher likelihood of being sustainable. So too is General Mills trading at a lower P/E multiple, making it a more compelling value proposition for passive income investors.

So to answer the question which is best between Kellogg vs General Mills stock, the answer is General Mills on a valuation basis and for its dividend sustainability.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.