General Mills Inc (GIS) is among the world’s sixth biggest food manufacturer and second largest cereal manufacturer in North America. GIS was founded in the 1860s based in Minneapolis (USA) with manufacturing plants in over 30 countries and sells products in more than 100 countries. GIS operates several international joint ventures including Cereal Partners Worldwide and Hi?? agen-Dazs ice cream joint ventures in Asia (GIS Financial overview 2009). Market capitalisation of the company stood at $19. 08 billion as at February 22, 2009. GIS is quoted on the New York Stock Exchange (NYSE).
In 1792, NYSE was created (NYSE Online 2009) and has since developed to become more efficient over the years. Market efficiency as reflected by the Efficient Market Hypothesis (EMH) states that markets are efficiency are based on information and that traded assets reflect new information. EMH may exist at three levels; Weak, Semi-strong and Strong forms. The strong form states that the current market price contains all public and private information (Pike ; Neale, 2009). The NYSE can be said to be efficient since research points to the fact that share prices react in an unbiased manner to new information.
Using the EMH, the market price of GIS as at 30 April 2009 could be described as its value, and this is 5069 cents. Criticisms of the efficient market hypothesis include: irrational exuberance exhibited by people being carried away with booms and busts, irrationality of human behaviour in making economic decisions, the unpredictability of stock prices. This report discusses GIS success at delivering value over the past 5 years; reviews changes in equity value over the last 12 months and attempts to value GIS’s equity using the Net asset valuation method; Price/earnings ratio and the Discounted cash flow method as at 30 April, 2009.
An attempt is also made to reconcile the differences in values and identify a reasonable estimate for the value of GIS Equity. For comparative analysis, ConAgra (CAG) – one of the top 10 largest food makers in the world is used. Jensen (2000) states that increasing shareholder value is the primary objective of a corporation. Shareholder value can be defined as the value that a shareholder is able to obtain from his/her investment in a company, usually made up of capital gains, dividend payments, and proceeds (TFAL 2009). Figure (a) shows a summary of the process for shareholder value creation (Barber 2009).
Figure (a): The Value Pyramid – Shareholder Value Analysis framework Source: Barber 2009 There are various methods used for calculating value for shareholders that a company generates. The concepts include Economic profit (EP)/Economic Value Added (EVA), and Market value added (MVA). Sparling and Turvey (2003) found a week correlation between EVA and shareholder returns. Their view is also shared by Fernandez (2006) who stated that EVA and MVA may not present a holistic picture of the value created by a company. These arguments led to the use of Total Shareholders Return (TSR) as a measure of value delivered.
According to Barber (2009), the TSR is made up of dividend and capital gains received by shareholders in return for their investments. GIS was successful in delivering value to its shareholders from 2004 to 2008. Their performance was above the market in 2005, 2007 and 2008. CAG recorded a lower TSR in all years under consideration except for 2004. GIS recorded unprecedented value of TSR in 2007 attributed to strong productivity and effective pricing strategy. GIS reported negative TSR in 2009 and a very low value in 2004. In 2004, although GIS earnings grew, it was not reflected in their stock price leading to the reduced TSR.
In 2005, GIS was able to deliver value despite facing challenges such as increasing commodity cost. The company increased dividends to shareholder by 13% to $1. 24 (GIS Online 2009). In 2006, the company performed well and grew their net sales by 4% to give $11. 6billion. Despite the increasing commodity costs and inflation, they delivered return to their shareholder and increased dividends by 8% to $1. 34. In 2007, the company experienced unprecedented success across all operating segments. Operating profits grew 8% to $2. 1billion and dividend payout increased by 7% to $1. 44 leading to value delivery to shareholders (GIS Online 2009).
Despite significant increase in commodity cost in 2008, the company was able to capitalize on preceding year’s success and further increase operating profit by 6% to over $2. 4billion. GIS’s sales and profit growth, coupled with a dividend yield of between 2 and 3 percent of stock price, resulted in returns to shareholder above the S&P 500 index. GIS recorded negative TSR in 2009 due to the fall in stock price caused by the current economic and financial recession which started in 2008. However, they still seem to perform better than competition ConAgra and the S&P 500 index.