Near a 15-Year Low, Is This 6.6%-Yielding Stock Too Cheap to Ignore or a Value Trap?
Key Points
Struggling cereal maker General Mills sees a road to recovery in sight.
Asset sales and efficiencies should boost pricing power and bolster the balance sheet.
General Mills is still supporting its high-yield dividend with free cash flow.
- 10 stocks we like better than General Mills ›
General Mills (NYSE: GIS) hit a 52-week low on March 24 in lockstep with a broader stock market sell-off. But zoom out, and the pain extended far beyond the last 12 months, as General Mills is around its lowest level in 15 years, while the S&P 500 has increased severalfold.
The sell-off has pushed General Mills' dividend yield up to 6.6%, making it one of the higher-yielding S&P 500 components. But a dividend is only as reliable as the company paying it. And although General Mills has paid a dividend without interruption for 127 years, some investors may view its rising yield as a red flag that the payout is becoming unsustainable.
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With that, let's determine if the value stock is too cheap to ignore or has more room to fall.
Image source: Getty Images.
Addressing challenges
With one quarter left to report in fiscal 2026, General Mills forecasts a 1.5% to 2% decline in full-year organic net sales and a 16% to 20% decline in adjusted earnings per share -- which is a bit inflated because General Mills sold some yogurt and pet food brands that are no longer contributing to earnings.
On March 17, General Mills announced it was selling its business in Brazil. The following day, on its third-quarter fiscal 2026 earnings call, General Mills discussed its goal to improve margins by focusing on its best brands and regions.
GIS data by YCharts
While management didn't provide guidance on product volume or specific margin improvements, it did say its multiyear transformation is boosting productivity and that it expects to return to price-mix growth, indicating that shifting sales to higher-margin items is paying off.
It's not just new premium products that are contributing to growth. General Mills remains confident in its core products, marketing, innovation, media spending, and price competition -- saying that the renovation of its core products is probably better than pre-COVID but that consumers are under more pressure than in 2019.
A deep-value stock for patient investors to buy
Despite lower sales and earnings, General Mills is still generating plenty of free cash flow to cover its dividend. And the stock is dirt cheap with a forward price-to-earnings ratio of just 10.7. But an affordable dividend and inexpensive valuations don't matter if General Mills fails to return to growth. Ultimately, that task falls on the company's brand portfolio, market position, and its execution.
Despite its recent struggles, General Mills doesn't strike me as a value trap because it isn't borrowing money to support its dividend, and its path to recovery is fairly achievable. In fact, if inflationary pressures ease, General Mills could be better positioned for long-term earnings and dividend growth than it was pre-pandemic -- making the stock a steal at current levels.
That said, it's understandable if some investors prefer to wait for General Mills to show measurable signs of a recovery before buying the stock -- especially considering the price has been falling with seemingly no end in sight.
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Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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