General Mills stock is up 5% on Wednesday after the packaged foods producer reported earnings that beat expectations and raised its dividend.
General Mills (ticker: GIS) reported an adjusted profit of $1.12 a share, exceeding forecasts for $1.01 a share, over net sales of $4.9 billion, topping expectations for $4.8 billion. Dividends went up from $0.51 to $0.55 per share, a 6% rise.
A strong quarter notwithstanding, the eyes of investors should be on guidance, not earnings. In a note published before earnings came out, Cody Ross and Simon Negin of UBS argued that, this calendar year, General Mills had sheltered itself from inflation with well-timed hedges, which helped the company weather rising crop prices and outperform its competitors who did not.
But will General Mills sustain growth in gross margins in 2023, once these hedges roll off? If the war between Russia and Ukraine does not end, neither will inflation of food crops.
The company anticipates its cost of sales will go up by a record of 14% next year and plans to raise the prices of its products to cope. The outlook estimates earnings per share growth will be 3%. Management's confidence in its ability to raise prices should reassure Ross and Negin, who wrote that, if price hikes are on the horizon, "investors will think guidance is achievable if not beatable."
Shares have gained 8.4% this year, while the Consumer Staples Select Sector SPDR exchange-traded fund (XLP), which includes General Mills, has slipped 7%, and the S&P 500 has fallen 20%.