Shareholders in General Mills (NYSE:GIS) are in the red if they invested three years ago

In order to justify the effort of selecting individual stocks, it's worth striving to beat the returns from a market index fund. But in any portfolio, there are likely to be some stocks that fall short of that benchmark. We regret to report that long term General Mills, Inc. (NYSE:GIS) shareholders have had that experience, with the share price dropping 14% in three years, versus a market return of about 43%.

Now let's have a look at the company's fundamentals, and see if the long term shareholder return has matched the performance of the underlying business.

Check out our latest analysis for General Mills

In his essay The Superinvestors of Graham-and-Doddsville Warren Buffett described how share prices do not always rationally reflect the value of a business. By comparing earnings per share (EPS) and share price changes over time, we can get a feel for how investor attitudes to a company have morphed over time.

During the unfortunate three years of share price decline, General Mills actually saw its earnings per share (EPS) improve by 8.8% per year. This is quite a puzzle, and suggests there might be something temporarily buoying the share price. Alternatively, growth expectations may have been unreasonable in the past.

It is a little bizarre to see the share price down, despite a strong improvement to earnings per share. So we'll have to take a look at other metrics to try to understand the price action.

We note that the dividend seems healthy enough, so that probably doesn't explain the share price drop. General Mills has maintained its top line over three years, so we doubt that has shareholders worried. So it might be worth looking at how revenue growth over time, in greater detail.

The company's revenue and earnings (over time) are depicted in the image below (click to see the exact numbers).

General Mills is a well known stock, with plenty of analyst coverage, suggesting some visibility into future growth. You can see what analysts are predicting for General Mills in this interactive graph of future profit estimates.

What About Dividends?

When looking at investment returns, it is important to consider the difference between total shareholder return (TSR) and share price return. The TSR incorporates the value of any spin-offs or discounted capital raisings, along with any dividends, based on the assumption that the dividends are reinvested. Arguably, the TSR gives a more comprehensive picture of the return generated by a stock. In the case of General Mills, it has a TSR of -4.9% for the last 3 years. That exceeds its share price return that we previously mentioned. And there's no prize for guessing that the dividend payments largely explain the divergence!

A Different Perspective

General Mills shareholders are down 4.8% for the year (even including dividends), but the market itself is up 24%. Even the share prices of good stocks drop sometimes, but we want to see improvements in the fundamental metrics of a business, before getting too interested. On the bright side, long term shareholders have made money, with a gain of 5% per year over half a decade. It could be that the recent sell-off is an opportunity, so it may be worth checking the fundamental data for signs of a long term growth trend. While it is well worth considering the different impacts that market conditions can have on the share price, there are other factors that are even more important. For example, we've discovered 1 warning sign for General Mills that you should be aware of before investing here.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies we expect will grow earnings.

Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on American exchanges.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.