Companies Report

Tyson Foods & General Mills Inc.

BerradaSubmitted to: Charles SchellDate: February 22, 2014

Executive Summary:This paper is providing analysis of two companies (Tyson Foods and General Mills Inc.) that are compared with a peer group from the same sector of activity. The performance measurement and analysis is the first part of the report, where we analyse both companies return on equity via the DuPont Analysis that is composed from several ratios such as the tax burden, interest burden, operating margin, asset utilization and financial leverage (three factors : Net profit Margin, asset utilization, Financial leverage). Also, this section provides a quantitative rating of both companies by using Moody’s methodologies. As a result of the rating, Tyson Foods has a rate of “A3” while General Mills has a score of “Baa1”. Moreover, the same section gives an insight of the cash conversion cycle of both companies, and also compares their performances to the peer group. In this point, Tyson Foods has a better performance due to its inventory management that is related to the sensitiveness of their core activity. The second section discusses the cost of capital by identifying first the capital structure of both companies and the average. At this point, the ratios used to identify the changes in the capital structure of the firms over the five years are debt to equity, debt to asset and interest cover. Further, in the same section we examine and explain Bloomberg’s estimations of the weighted average cost of capital, economic Value Added and EVA Spread. This examination allows us to give positive conclusions about both firms, especially that they have a positive EVA spread (General Mills much better than Tyson foods). The last section discusses the payout policy of both firms, whether if it is in the form of splits, share repurchases or dividends. Both companies distribute dividends and repurchase shares in the market so they can raise the share price and be profitable for investors.

Table des matièresIntroduction :......................................................................................................................................................2

I. Performance Measurement and Analysis :.................................................................................................2

DuPont Analysis..............................................................................................................................................2

DuPont Three Factors:................................................................................................................................3

DuPont Five Factors :..................................................................................................................................7

Return On Equity Trend :...........................................................................................................................10

Moody’s Bond rating Criteria Benchmark:....................................................................................................11

a. Tyson Foods......................................................................................................................................11

b. General Mills:....................................................................................................................................12

Working Capital:............................................................................................................................................13

a. Tyson Foods:.....................................................................................................................................13

b. General Mills:....................................................................................................................................14

II. Cost of Capital...........................................................................................................................................15

a. Capital Structure:..............................................................................................................................15

b. Weighted Average Cost of Capital & EVA..........................................................................................16

III. Payout Policy:........................................................................................................................................19

Conclusion :.......................................................................................................................................................20

Introduction :The report represents analysis of two companies which are Tyson Foods that operates in the Poultry Slaughtering and processing, and General Mills which activity is Cereal and breakfast food.

I. Performance Measurement and Analysis :

DuPont Analysis One of the most important ratios for an investor willing to be a shareholder in a company is the return on equity. The return on equity is a ratio that measures the ability of a firm to make benefits by using the shareholders money. The ratio can be divided into multiple parts given detailed information about the efficiency in conducting the activity and the profitability that the company generate. Different ways to calculate the Return On Equity can be used such as the two, the three and the five factors DuPont analysis.

Two Factors DuPont=ROA x Financial Leverage

Two Factors Dupont= Net IncomeTotal Assets

xTotal AssetsTotal Equity

The DuPont two factors is using an important ratio which is the Return on Asset (ROA,)that brings more details about the efficiency in using the assets to generate the profits.

Three Factors DuPont=Net Profit Margin x Asset Utilization x Financial LeverageNet IncomeTotal Equity

= Net IncomeSales

xSales

Total Assetsx

Total AssetsTotal Equity

In the calculation of the ROE with three components, other important ratios are added such as the Net profit margins and the asset utilization. The first ratio indicates the weight of profit from the net Sales, while the Asset utilization shows the ability of generating revenues via the utilization of assets.

ROE=TaxBurden x InterestBurden x OperatingMargin x AssetUtilization x Financial Leverage

Net IncomeTotal Equity

= NetIncomeEBT

xEBTEBIT

xEBITSales

xSales

Total Assetsx

Total AssetTotal Equity

Both companies are compared with the peer group (competitors from the same stock exchange and sector); data was gathered from the database Mergent and then compared with the annual reports, all to avoid errors in numbers that could lead to inaccurate conclusions. Because most of the companies publish their annual report in different periods, it has been relevant to choose the time-lapse from 2008 to 2012. The competitors selected for the peer group are a mixture from different sub-industries because both companies analyzed do not belong to the same one (Tyson Foods: Poultry slaughtering and processing; General Mills: Cereal breakfast foods). Moreover, the other factor that contributed to construct the industry sample is the size of the companies, their capital structure, the number of employees, revenues from activity and the net income. Also the annual report of Tyson foods includes those companies in their industry sample, a fact that

has strengthen our decision to follow up. In this case, the competitors that form our industry sample are: Kellogg’s, ConAgra Foods, Hormel Foods, B&G Foods, McCormick & Co.

.

DuPont Three Factors: Since DuPont three factors is composed from Asset Utilization, Net profit Margins and Financial leverage; it is important to analyse each part apart, by arguing about the main changes that occurred. Both companies are compared with the peer group

1. Asset Utilization:

2008 2009 2010 2011 2012

As-set Uti-lization (TSN)

2.47576036866359

2.52043416705993

2.64415922619048

2.91446120494987

2.79741089441829

As-set Uti-lization (GIS)

0.716961809931939

0.821900105176002

0.836958181787328

0.796819191946237

0.789593682454211

As-set Uti-lization (Industry)

1.15309318059509

1.0954124073604

1.09412528401142

1.10256636758777

0.998604440180303

0.250.751.251.752.252.753.25

Asset Utilization

a. Analysing the information presented, we can notice that the Tyson Foods is above industry average, while General Mills is the complete opposite. Meanwhile, both companies are registering the same performance while looking at their financial statements, which prove that they are both growing.

b. From 2008 to 2009, Tyson foods sales registered a decrease of 0.6% due to the deterioration of sales price. This impact had cost the company $1.2 billion (4.8% decrease in sales price) basically because of the beef and pork segments. From 2009 to 2010, the scenario changed from a decline to growth principally because of the positive variation of sales price that reached 7.1%, jumping from $26.704 to $28.430 million in the total sales. From 2010 to 2011, sales increased considerably by registering a progress of 13.5%, primarily due to an increase in the average sales price of $3.4 billion. It is the consequence of the rising in price of raw materials, most of them driven by the beef and pork segments. From 2011 to 2012, the percentage sales growth was 3.1%, 10% less than the previous year. It is the consequence of a change in sales volume that deteriorated by 4.3%, principally because of the decrease of 1.7 billion in all segments volume (beef, chicken), except pork that maintained its volume. From the other side, the total asset has continuously increased from 2008 to 2012 by

registering respectively $10.850 and 11.896, an increase of 9.64%. this increase in principally due to the investment in plants in properties, but also due to the investments in join venture in 2011 with an ownership of 50% from “Dynamic Fuels” that had a total asset in 2012 $177 million, which $146 million was net property, plants and equipment. Furthermore, “cash & cash equivalent” is another account that varied considerably from $250 in 2008 to $1.071 million in 2012 due to the cash management activity which consist in investing in short term securities.(Tyson Foods Inc. annual report, 2009, 2010,2012).

c. For General Mills, the Asset Utilization asset ratio had a slight variation going from 0.72 in 2008 to 0.79 in 2012. The main variations remain in the goodwill and other intangible assets that do not encounter amortization compared to plants and equipment that drop its value (General Mills annual report, 2009,2010).

2. Financial Leverage:

2008 2009 2010 2011 2012

Financial Leverage (TSN)

2.1639409652971

7

2.4345128676470

6

2.0672947510094

2

1.9474054529463

5

1.9688844753392

9

Financial Leverage (GIS)

3.0634190289262

8

3.4542678802635

9

3.1301168555240

8

2.8242491152717

7

3.0651924390137

6

Financial Leverage (Industry)

4.0924138260625

7

3.0405076156774

4

3.1451789790481

5

3.6415785471863

9

3.4586427491680

3

0.25000.75001.25001.75002.25002.75003.25003.75004.2500

Financial Leverage

a. The Financial leverage is calculated by dividing the total equity by the total Asset, which is resulting in giving us a ratio, which can be in most of the time greater than 1.00. This ratio gives an idea about how greater the assets are than the equities, and how the company is financing its investments. If the corporation does not have debt, than the ratio might close or inferior than one. In our case, both companies have long term debt, which are composed heavily by bonds.

b. For this ratio, both companies had a slight increase in 2009 principally due to the total equity that decreased. During that special period, the financial markets were so volatile (financial crisis), that the value of the share dropped, impacting negatively the shareholder’s equity. After 2009, both companies saw the value of their equity returning back to its normal price, a fact this shown by the numbers reported on 2008 and 2012.

c. The total asset was discussed above for the analyse of the asset utilization, and it was considerably increasing during that period.

d. Both companies are under the peer group average, except for General Mills which is slightly close in 2012 registering a financial leverage of 3.06.

3. Net Profit Margin :

2008 2009 2010 2011 2012

Net Profit Margin (TSN)

0.0032015486560

9411

-0.0201093469143

2

0.0269081955680

619

0.0227174115167

669

0.0173087324959

433

Net Profit Margin (GIS)

0.0948352268149

223

0.0887872414286

006

0.1034366235258

34

0.1208518702705

61

0.0940874900197

504

Net Profit Margin (Industry)

0.0618332643849

131

0.0675334148832

227

0.0791600016906

728

0.0764390755377

649

0.0746977384610

344

-3.00%

1.00%

5.00%

9.00%

13.00%

Net Profit Margin

Axis Title

The Net Profit Margin is a ratio calculating the percentage of profits from the net sales. This ratio demonstrates how efficient the company is in controlling its total expenses. However, the net income used to calculate the ratio includes the noncontrolling interest (subsidiaries) that are part from Tyson and General Mills, and sometimes contributing in the success of companies. Choosing the net income before deducting the noncontrolling interest is a part of my personal judgement, and found it important this account and not the one of “net Income attributable “to the company.

a. The net profit margin represents a different situation from the ratios discussed above, because Tyson Foods company is far below the industry average, and the General Mills is over-performing the market.

b. Tyson Foods had a net Profit Margin which is fluctuating considerably, especially in 2009 when it the ratio dropped to –2.01%. The cause of this result is mainly due to several accounts that impacted the performance of the company. The cost of goods sold represents 95.5% of the sales, and leave a gross margin of $1,203 million. Also, the beef segment goodwill impairment charge issued en 2009 led the company to a negative operating income. Because the markets were instable due to the financial crisis, and the performance of the company deteriorated considerably, the credit rating for the corporation was downgraded by “Standard & Poors” from “BBB” to “BB” , so a variation in interest rate going from 6.85% to 7.35%. In 2009, Moody’s investors services downgraded the company’s credit rating from “Ba1” to “Ba3”, taking the interest rates from 7.35% to 7.85% , that was effective for the six months interest payment due April 1, 2009. This explains the fact that the interest expenses jumped from $215 million in 2008 to $310 million in 2009. In 2010, the activity came back

to its normal by registering a growth in sales of 6.5%, a reduction in cost of goods sold of 5%. As a consequence, the gross profit jumped from $1,203 million in 2009 to $2,514 million in 2010, an increase of 108.77%.

c. Compared to Tyson Foods, General Mills does not seem to struggle with its ratios primarily because it is registering an increasing net sale going from $13.548 million in 2008 to $16.657 in 2012, with an positive variation of 23%. The net Income seems to be in perfect correlation with the sales because of its continuous improvement, except for 2009 where it registered a shy improvement.

DuPont Five Factors :

1. Operating Margin 1:

2008 2009 2010 2011 2012

Op-erat-ing Margin (TSN)

0.0123222395949669

-0.008051228

28040743

0.0547309180443194

0.039825203000062

0.0375022537412104

Op-erat-ing Margin (GIS)

0.163183686026326

0.158113985828347

0.176129490082114

0.186455827206624

0.153824911903661

Op-erat-ing Margin (In-dus-try)

0.117725254783455

0.133278754876188

0.144165690394327

0.132206817168939

0.134806683682694

-2.50%2.50%

7.50%

12.50%17.50%

Operating Margin

1. As it was discussed above, the cost of goods sold and the beef segment goodwill impairment are the main factors that influenced the performance of Tyson Foods in 2009, a fact that obliged the company to register a ratio of -0.81%. The firm recovered in 2010 by controlling its cost of goods sold and its operating expenses, which led to a positive variation of approximately 6%.

2. General Mills seems to be benefiting from its foreign operations that are increasing considerably, covering the decrease that the company is registering in the domestic market. The net sales are improving slowly as it registered $10,209 million in 2010 and $10,480 million in 2012 with a low decline of 0.45%. In the foreign market, the net sales jumped from $2.684 million in 2010 to $4.194 million in 2012 a variation of 56%, a fact that is impacting positively the total net sales that improved from $ 14.635 million in 2010 to $16,657 million in 2012. The operating profits benefits also from the international operations that register an increase of 123% from 2010 to 2012. The decline in 2012 of

1 The Operating margin represents approximately the same issue as the Net profit Margin discussed earlier. The difference between both ratios is that in the net profit margin, we take into consideration for the calculation the Net income divided by the net sales, while for the Operating margin, we take into consideration the Earnings before Interest and Taxes divided by the net sales. Even with the change in the formula, Tyson Foods is still a way below the industry average while General Mills seems to register good performance.

the ratio is essentially due to the decrease in operating income from 2011 to 2012, impacted principally by the Unallocated corporate items, restructuring, impairment and other exit costs (Corporate overhead expenses, contribution to General Mills foundation, variances to planned domestic employee benefits and incentives, items that are not included in the segment operating performance) that registered $448 million extra expense.

2. Tax Burden

2008 2009 2010 2011 2012

Tax Bur-den (TSN)

0.558441558441558

1.02091254752852

0.635910224438903

0.682495344506518

0.621359223300971

Tax Bur-den (GIS)

0.716848458003433

0.674840912618345

0.694261737355409

0.740589737253933

0.709025107441755

Tax Bur-den (In-dus-try)

0.743838895836609

0.67400640034703

0.695016721024286

0.706895919055035

0.697062048349184

10.00%30.00%50.00%70.00%90.00%

110.00%

Tax Burden

The purpose of the tax burden ratio is measuring the weight of taxes that the company is forced to pay. In another way, it is to conclude how the corporation is profitable, and how much benefits it makes after deducting the taxes.The fluctuations are due to the variation in the net Income (discussed above) of the companies, with a small influence of the international activities that are slightly different (Tyson Foods annual report, 2012; General Mills, 2012). Also, the location of the companies in US (the state and local income taxes, net of federal tax benefits) play a role in increasing or lowering the rate.

3. Interest Burden2:

2008 2009 2010 2011 2012

In-terest Burden (TSN)

0.465256797583082

2.44651162790698

0.773136246786632

0.83579766536965

0.742788461538462

In-terest Burden (GIS)

0.810710117604812

0.832106418700762

0.845900003837151

0.875184717967201

0.862667811426787

In-terest Burden (Industry)

0.735133655780517

0.782716074950081

0.818345247563588

0.837043229132259

0.833274538863752

25.00%

75.00%

125.00%

175.00%

225.00%

275.00%

Interest Burden

a. Tyson Foods interest fluctuation (especially in 2009) was primarily because credit rating that was downgraded from “Ba1” to “Ba3”, dragging the interest rate from 6.85% to 7.85%. By this fact, the company saw its interest expenses getting higher as long as the investment in the company becomes riskier. This explains the fact that the interest expenses jumped from $215 million in 2008 to $310 million in 2009. In 2010, Standard and Poor’s upgraded the credit rating from “BB” to “BB+”, and also Moody’s from “Ba3” to Ba2” changing the interest rate from 7.85% to 7.35%. in 2011, the company was upgraded by S&P to “BBB-“ and Moody’s to “Ba1”, taking the interest rate to 6.85%, as it was in 2008. In 2012, the corporation was upgraded again by Moody’s to “Baa3” taking its interest rate to 6.60%. those facts influenced radically the interest burden ratio that dropped from 244% in 2009 to 74%. However, the company is still paying in 2012 the losses on early extinguishment of debt of 10.50% on senior Notes due on 2014, with the amount of $167 million, which explains why the interest expenses became higher in 2012, but slightly aligned to the industry average.

b. General Mills is a company that is massively exposed to the fluctuation rate of the future issuances of fixed-rate debt, existing and future issuances of the floating rate debt. Primary exposures come from the US Treasury rates, LIBOR (London Interbank Offered Rate), EURIBOR, and commercial paper rate in US and EU. The company uses the Swaps interest rate (and other derivates such as Futures and options), and then exchange the floating with the fixed rate with a counterparty, so it can prevent from the fluctuations of the market. By this fact, the company succeeded to maintain its net interest and its interest burden ratio between 81% and 86%, all by applying for an effective risk management that lower the risk of exposure in the financial markets.

2 The interest burden is a ratio that helps in distinguishing the weight of interest in the income statement of the company. In another words, it refers to the percentage of interest expenses that is deducted from the EBIT, that lead right after to the earnings before tax. If the company adopted the strategy to finance its investments by issuing bonds, the interest expenses raise, and then lower the earnings before taxes.

Return On Equity Trend :

The return on Equity measures the profitability of a company and its benefits after using the shareholders’ money. It is the net income divided by the total shareholders’ equity, a ratio that shows the ability of a company to manage efficiently the capital received from investors.

2008 2009 2010 2011 2012

-20.00%

0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

Industry Profitability Ratios

McCormick & Co ROE (Five Factor) B&G Foods ROE (Five Factor) Hormel Foods ROE (Five Factor) ConAgra Foods ROE (Five Factor) Kellogg Co. ROE (Five Factors) General Mills ROE (Five Factor) Tyson Foods ROE (Five Factor) Industry ROE

After analysing all the components of the DuPont return on equity, both companies seems to be in different situations. General Mills performs better than Tyson Foods which is far below the industry average. Tyson’s performance is recovering from the terrible losses of 2009, which declined the ROE to -12.54%. Also, Tyson has the lowest ROE of all companies combined, while General Mills is almost aligned to the industry average. The table below shows ROE of both companies and the peer group.

0.72 0.82 0.84 0.80 0.79 0.793.0634 3.4543 3.1301 2.8242 3.0652 3.119.48% 8.88% 10.34% 12.09% 9.41% 10.04%

Moody’s Bond rating Criteria Benchmark:

Moody’s Bond rating methodology’s purpose is to provide investors, companies and other market participants an understanding of what are the factors that affect the rating of a company (Moody’s Rating Methodology, 2013). In this paper, only quantitative risks are taking into consideration as long as it is difficult to make accurate assumptions about the qualitative ones. The companies that I am comparing do not figure in the same methodology because of their diversified activity, the fact that explains why I calculated differently the rates. General Mills figures in the “Global Packaged Goods” Methodology, while Tyson Foods belongs to the “Global Protein and Agriculture Industry” methodology.

a. Tyson Foods

Tyson Foods2010 2011 2012

Debt 2,536,000 2,182,000 2,432,000EBIT 1,556,000 1,285,000 1,248,000Depreciation 416,000 433,000 443,000Amortization 81,000 73,000 56,000

497,000 506,000 499,000

EBITDA 2,053,000 1,791,000 1,747,000CFO 1,432,000 1,046,000 1,187,000Cash & Cash equivalent 978,000 716,000 1,071,000Net Debt 1,558,000 1,466,000 1,361,000Book Capitalization 7,737,000 7,867,000 8,474,000EBITA 1,637,000 1,358,000 1,304,000Interest Expense 347,000 242,000 356,000

Financial RatiosRating Coefficient

Leverage & Coverage 40% 100%Debt/ EBITDA 10% 25% 1.24 1.22 1.39 1.28 A 6CFO/ Net Debt 10% 25% 91.91% 71.35% 87.22% 83.49% Aa 3Debt/ book capitalisation 10% 25% 32.78% 27.74% 28.70% 29.74% A 6Ebita/ Interest Expense 10% 25% 4.72 5.61 3.66 4.66 Ba 12

Overall Mark 6.75

Depreciation and amortisation

Weight in the methodology

Adjusted weight

For Tyson foods, all qualitative factors were excluded from the calculation, leaving behind only one quantitative factor which is the “leverage & Coverage” that weighted 40% from all the factors. The factor includes ratios that are all related to the long term debt. It provides the ability of the company to cover its debts and interest after making results from operations. For the debt / EBITDA ratio, the company scored a rate of “A” after an average for the last three years of 1.28. This score can be explained by the maintained performance of the EBITDA over the last 2 years, also with the maintained level of debt. The company has a strategy of issuing new bonds with a small/long term maturity, to purchase the bonds that are reaching their maturity sooner (Tyson foods annual report, 2012). By this fact, the company erases the risk of non-restitution of the principal to the investors, and keeps a good rate concerning the payment of the principal. The Cash from operations (CFO)/ net debt3 provides a percentage of the remaining debt after reducing all operating expenses. The corporation registers the highest score “Aa” due its liquidity strategy. In 2012, the company had $2 billion in cash, giving to itself the opportunity to pay back its debts, interest expenses and

3 The cash from operations is taken from the cash flow statement, while the net debt is calculated based on the (debt- cash & cash equivalent).

permit to itself also to repurchase shares in order to maintain its share price. The Debt to book capitalization4 provides an idea about the amount of debt invested in assets compared to the book capitalization (total Equity). The rate of the company is “A” with an average of 29%. This result is mainly explained by the trend that the company is adopting through the years. The company might be adopting a strategy to maintain its debt in the weight of 30% out of its investment capital, judging that it is the optimal weight for its industry. The last ratio EBITA/ Interest expense show the ability of the company to cover its cost from borrowing. The ratio rate is “Baa” with an average of 4.66. the rate was primarily impacted the lower performance in 2012 due to a lower EBITA and a raise in interest expenses. In 2012, the increase in interest expenses is due to the non-cash interest expense that includes interest related to the amortization of debt issuance costs and discounts/ premiums on note issuances. It included debt issuance costs incurred on the revolving credit facility, the notes of 2014, and the 4.5% senior notes due 2022 issued on June 2012. After all, the corporation has an average of 6.75 which lead to an overall rate of A3 which is a good rate compared to its competitors. In Moody’s methodology, Tyson is rated “Ba1”, mainly because of its qualitative factors that drained the down.

b. General Mills: General Mills

2010 2011 2012EBIT 2,606,100 2,774,500 2,562,400Net Sales 14,796,500 14,880,200 16,657,900

Long-term debt 5,375,800 6,573,800 6,903,100Depreciation & Amortization 457,100 472,600 541,500EBITDA 3,063,200 3,247,100 3,103,900Net Income 1,535,000 1,803,500 1,589,100

-4,500 -5,200 -21,800

Dividend Paid -643,700 -729,400 -800,100RCF 886,800 1,068,900 767,200Cash & Cash Equivalent 673,200 619,600 471,200Net Debt 4,702,600 5,954,200 6,431,900Interest Expense 374,500 360,900 370,700

Financial Ratios Grading CoefficientProfitability 7% 25%EBIT Margin 17.61% 18.65% 15.38% 17.21% A 6Leverage & Coverage 21% 75%Debt/EBITDA 7% 25% 1.75 2.02 2.22 2.00 A 6RCF/ Net Debt 7% 25% 16.50% 16.26% 11.11% 14.62% B 15EBIT/ Interest Expense 7% 25% 6.96 7.69 6.91 7.19 A 6

28% 100% Overall Mark 8.25

Net earnings attributable to noncontrolling interests

Weight in the methodology

Adjusted Weight

Compared to Tyson Foods, General Mills belongs to the global packaged Goods Methodology which is evaluated by five qualitative and quantitative factors. Profitability and leverage & coverage are the main quantitative factors that are rating this segment of companies. Starting by profitability, the ratio decreased considerably from 2011 to 2012 due to the increases in sales and operating expenses. This variation was mainly related to the acquisition of Yoplait S.A.S in 2011 and Yoki alimentos S.A that had risen the net sales by 12 points, and the goodwill by $96 million. The Corporation has a rate of “A” with an average of 17.21%.

For the leverage & coverage factor, the company is evaluated by 3 major ratios: debt/EBITDA, RCF/ Net debt and EBIT/ Interest expense. The debt to EBITDA has registered an average of 2.00 with an “A” rate, maintaining its performance even if the amount of amortization and depreciation increased due to acquisitions. The RCF/net debt ratio demonstrates the ability of the company to pay out its debt after

4 The book capitalization is the sum of debt and total shareholders’ equity.

distributing dividends. As we can see, the company maintained its level in 2010 and 2011, but in 2012 the ratio dropped to 11.11, taking the ratio to worst position by having a “B” rate. The cause of this decline is mainly because of the dividend5 that rose, but also because of the net amount of debt. The last ratio which is EBIT/interest expense, its purpose is to demonstrate the ability the fund the cost of its borrowed capital. The company seems to do very in this area. Its risk management (As it was discussed in the Interest Burden ratio, for the ROE) maintain the level higher even if there is small fluctuation due issuance of some Senior notes in 2012. The company’s overall rate is quiet good compared to its competitors in the same methodology. It collected three “A” and one “B” the fact that gave it an overall of “Baa1”.

Working Capital:

a. Tyson Foods:

Inventories 2,538,000 2,009,000 2,274,000 2,587,000 2,809,000 2,443,400Cost of sales 25,616,000 25,501,000 25,916,000 30,067,000 31,118,000 27,643,600Accounts receivable, net 1,271,000 1,100,000 1,198,000 1,321,000 1,378,000 1,253,600Sales 26,862,000 26,704,000 28,430,000 32,266,000 33,278,000 29,508,000Accounts payable 1,013,000 1,217,000 1,110,000 1,264,000 1,372,000 1,195,200

Days Inventory (DSI) 36.16 28.76 32.03 31.41 32.95 32.26Days Receivable (DSO) 17.27 15.04 15.38 14.94 15.11 15.55Operating income 53.43 43.79 47.41 46.35 48.06 47.81Days payable (DPO) 14.43 17.42 15.63 15.34 16.09 15.78Days Working Capital (DWC) 37.99 25.86 30.32 29.91 30.88 30.95Cash Conversion Cycle 39.00 26.37 31.77 31.00 31.97 32.02

Days of Inventory: the company have seen its days inventory decrease from 36.16 in 2008 to 28.76 days in 2009, due principally to a strategy adopted by the company to reduce the inventory volume that saved the company around $500 million. This reduction in volumes is the result of the reduction of cost of feeds of animal (Corn and soybeans) and also the decline of the market demand (result of economic crisis that lead the consumer to consume less than they were) in beef, pork and chicken. After 2009, the corporation maintained its level around 30 days inventory, even if the inventory prices and cost of sales went up considerably (due to the increase in input costs).

Days receivable : the days receivable didn’t encounter any significant change from 2009 to 2012, basically because the company is contracting with businesses that have been trading with the company for a while like Walmart which has 13% part from the portfolio (it is the only customer that has more than 10% part in the portfolio of the company). The decrease in 2009 is due basically to the slight decrease in sales (economic crisis as described earlier), which impacted the account receivable. Both ratios influence the Operating Income as long as they are part of its calculation. The year 2009 was an exceptional year where the company has gained the lessons learned from 2008, and managed its supply according to the market demand. This strategy had led to a profitable situation where the company has save costs.

The company has a crucial activity where it has to maintain an accurate relationship with it suppliers. Its main payables are independent contract growers for chicken and cattle buyers for beef and pork segments. The trend in days payable is not significant, except in 2009 where it goes up by 2 days payable.

5 For the Dividends, we will discuss further in the distribution section.

All the ratios take us to analyse the days working capital and the cash conversion cycle that declined considerably in 2009, creating savings cost for the companies due to the inventories and receivable. Collecting money rapidly and extending the days payable is a strategy that allow the company to be in a comfortable situation.

b. General Mills: Days payable (DPO) 14.43 17.42 15.63 15.34 16.09 15.78Days Working Capital (DWC) 37.99 25.86 30.32 29.91 30.88 30.95Cash Conversion Cycle 39.00 26.37 31.77 31.00 31.97 32.02

General Mills, Inc. (NYS: GIS)

Report Date 2008 2009 2010 2011 2012 Average

Inventories 1,366,800 1,346,800 1,344,000 1,609,300 1,478,800 1,429,140Cost of sales 8,778,300 9,457,800 8,922,900 8,926,700 10,613,200 9,339,780Receivables 1,081,600 953,400 1,041,600 1,162,300 1,323,600 1,112,500Net sales 13,652,100 14,691,300 14,796,500 14,880,200 16,657,900 14,935,600

General mills experienced from 2008 to 2009 a decline in all ratios due principally to the economic environment. Day’s inventory slightly decreased due to the deterioration of the values and level of grains, also because of the increase of cost of sales that was due to the input cost inflation. The cost of sales also increased due to a depreciation caused by “La Saltena” (a pasta plant manufacturing based in Argentina) that was destroyed by fire, resulting in considerable losses. Because the company’s main customer are retail stores for more than 54% with Walmart that has 25% in US. Receivable is principally impacted by the foreign exchange translation and sales timing shift. The payables decreased as a result of lower vendor paybales associated with inventories and construction in progress, as well as foreign exchange translation. In 2011, the cash conversion cycle increased by 8 days mainly because of days inventory that augmented by 11 days due to commodity prices impacted by inflation. In 2012, the major variations are related to cost of sales that increased by $1.686 million driven by a jump in volume and input cost. The variation in sales (as it was discussed before) was primarily contributed by the acquisition of companies like Yoplait. The Cash conversion Cycle for General mills Fluctuated significantly during this last 5 years, but remains relatively around the average of 46 days.

2010 2011 2012 Average

2,274,000 2,587,000 2,809,000 2,443,40025,916,000 30,067,000 31,118,000 27,643,600

1,198,000 1,321,000 1,378,000 1,253,60028,430,000 32,266,000 33,278,000 29,508,000

1,110,000 1,264,000 1,372,000 1,195,200

32.03 31.41 32.95 32.26

To conclude, the average of both companies seems to beat the industry average that far above their performance all over the 5 years.

II. Cost of Capital

a. Capital Structure 6 :

Debt to Equity

Tyson Foods 2008 2009 2010 2011 2012 AverageLong-term debt 2,896,000 3,552,000 2,536,000 2,182,000 2,432,000Total shareholders' equity 5,014,000 4,352,000 5,201,000 5,685,000 6,042,000Total assets 10,850,000 10,595,000 10,752,000 11,071,000 11,896,000Operating income (loss) EBIT 331,000 -215,000 1,556,000 1,285,000 1,248,000Interest expense 215,000 310,000 347,000 242,000 356,000

The company’s capital structure is evaluated through the three main ratios: Interest cover ratio, Debt to Equity, Debt to asset. The major fluctuation in interest cover ratio is in 2009 where the company registered a negative EBIT. This means that the company is unable to cover the interest that was $95 million, an increase of 44%. After this period, the company succeeded to recover from it losses by registering a ratio of 4.48 in 2010. The same scenario occurred in 2009 for both debts to equity and debt to asset. The company’s debt rose in 2009 due to the issuance of senior note due on March 2014 of $756 million, with an interest rate of 10.50%. the following years, the company lowered the level of debt to reach 20.44% of asset and 40.25% of equity.

Debt to Equity

Tyson Foods 2008 2009 2010 2011 2012 AverageLong-term debt 2,896,000 3,552,000 2,536,000 2,182,000 2,432,000Total shareholders' equity 5,014,000 4,352,000 5,201,000 5,685,000 6,042,000Total assets 10,850,000 10,595,000 10,752,000 11,071,000 11,896,000Operating income (loss) EBIT 331,000 -215,000 1,556,000 1,285,000 1,248,000Interest expense 215,000 310,000 347,000 242,000 356,000

For General Mills, the interest cover ratio and the debt to asset seems to maintain a constant level from 2008 to 2012. The interest cover ratio augmented from 5.16 in 2008 to 6.91 in 2012, while the debt to asset moved from 25.16% to 32.72% for the same period. This slight improvement is due principally to issuance of senior notes that almost doubled the amount of long term debt. Because the company is trading its debt in the financial market through Swaps, it lowered its interest expenses by exchanging floating interest rates with fixed rate, a management that gave its fruit through the reduction of the expenses from $432 million to $370 million. The debt to equity reached 121.04% due to the icrease of debt, but also the decrease od the total equity, tha varied from $6.215 million to $5.174 million.6 The capital Structure of a company refers to the weight of capital (debt/ equity) used to finance the investment in term of asset and projects.

2009 2010 2011 2012 Average

Compared to the industry average, both companies seem over-perform in whole the ratios, except Tyson Foods that is under the industry in the interest cover ratio.

b. Weighted Average Cost of Capital & EVA

D E RE +PD+E+P D+E+P D+E+P

Where: D= DebtE= EquityP= Preffered stockrd= Yield to Maturity

rp = Cost of preferred stock

tc= Effective Tax Rate (Annual Reports)rm= market return

re (cost of equity)= rf+ β(rm-rf)

rf= risk free raterm-rf= market premium

re +

WACC Formula

rpWACC = X rd (1-T) + X X

This formula represents mainly how to calculate the rent on capital (Equity and Debts) via the WACC. However, by using this formula, we are able to deduce the EVA by multiplying the WACC with the capital invested. The difference between the result and the Net operating profit After tax (NOPAT) give us the EVA.

As well, the EVA spread is calculated by making the difference between the EVA and the return on Invested Capital (ROIC).

EVA spread=ROIC−EVA

Tyson Foods:

Figure 1: EVA Spread Tyson Foods.

As we can see, Tyson Foods have a weight of 80.3% in equity and 19.7% in debt. Bloomberg’s assumption for the cost of equity is 9.8%, calculated with a risk rate free of 2.83%, a beta of 0.90 and a country premium of 7.74% (expected market return of 10.57% multiplied by the risk free rate). The cost of debt is 2.2%, and because the company do not issue preferred equity, we reject it from the formula. After calculating the NOPAT, the EVA of the company is $126 million, which means that the company has created economic value.

The ROIC is 9.73%, and if we reduce the WACC, the EVA spread is 1.41%, which means that the company has augmented the shareholders’ value by only 1.41%. By analysing the graphs of the different components, we can notice that before 2008, the ROIC was always below the WACC, which means that the company was destroying the shareholders value. However, the situation changed in 2010 when the ROIC exceeded the WACC, and then started producing an economic added value (showed in the history section of the picture).

My assumption for the future trends, we can see that the EVA (blue line) is starting to heavily decline from the end 2013, perfectly correlated with the EVA spread (green line) that also decline. The ROIC will remains constant and above the WACC (yellow line), which we expect to maintain its trend, as long as it did not change the trend from 2005.

General Mills

For General Mills, the capital structure seems to be the same as the one of Tyson Foods, but with a lower WACC that is equal to 6.6%. By registering a ROIC of 13, 61%, twice higher than WACC, the company is succeded to obtain an EVA spread of 7.03%, which means that it created value for the shareholders.

For my personal assumption, the General Mills’ trends are decreasing considerably after two years of growth. As we can see in the beginning of 2004, the trend of the company were falling down until reaching 5%, and then remain constant for three years (2004, 2005, 2006). After decreasing considerably in 2007 (due to financial crisis), the company made an incredible increase in all the component (except WACC that remained constant from the whole period). However, the EVA spread decreased again after one year of good performance, to slightly increase for three years. In 2012, the trend increase again and remained steady for 2 others until 2014. Nevertheless, it seems that the company has a repeated trend every 5 years, which make us believe that trend is going heavily going to decline again to make some correction for the next two years.

III. Payout Policy:Tyson Foods

2008 2009 2010 2011 2012Net Income 86,000 -537,000 765,000 733,000 576,000Weighted average class A shares outstanding - basic 281,000 302,000 303,000 303,000 293,000Weighted average class B shares outstanding - basic 70,000 70,000 70,000 70,000 70,000Weighted average shares outstanding - diluted 356,000 372,000 379,000 380,000 370,000Average Outstanding shares 235,667 248,000 250,667 251,000 244,333Retained Earning 3,006,000 2,409,000 3,113,000 3,801,000 4,327,000Dividend paid 56,000 60,000 59,000 59,000 57,000Net Share repurchase 297,000 19,000 48,000 207,000 230,000Earning per share 0.36 -2.17 3.05 2.92 2.36Net cash flows from operating activities 288,000 1,025,000 1,432,000 1,046,000 1,187,000Capital Expenditures -425,000 -368,000 -550,000 -643,000 -690,000Free cash Flow -137,000 657,000 882,000 403,000 497,000

Tyson Foods payout out seems to be diversified as long as they are performing well and registering profits from their operations. The company has distributed constantly dividends from 2008 to 2012, even in the period where the activity was unprofitable. By this strategy, the company tried to gain the trust of investors by raising in 209 their dividend by $4 million. During the same year, the company did not adopt the strategy of repurchasing their shares due the loss, and not even the following year because they had to recover from 2009. From 2011 to 2012, the corporation started repurchasing again its shares principally to raise the share price, and also to reduce the amount of cash hold.

General Mills

2008 2009 2010 2011 2012Net Income 1,294,700 1,304,400 1,530,500 1,798,300 1,567,300Weighted average shares outstanding - basic 666,000 663,800 659,600 642,700 648,100Weighted average shares outstanding - diluted 693,800 687,000 683,300 664,800 666,700Average Outstanding shares 1,359,800 1,350,800 1,342,900 1,307,500 1,314,800Retained Earning 6,510,700 7,235,600 8,122,400 9,191,300 9,958,500Dividend paid 529,700 579,500 643,700 729,400 800,100Net Share repurchase 1,335,300 902,100 189,000 646,900 16,400Earning per share 0.95 0.97 1.14 1.38 1.19Net cash flows from operating activities 1,729,900 1,828,200 2,181,200 1,526,800 2,402,000Capital Expenditures -522,000 -562,600 -649,900 -648,800 -675,900Free cash Flow 1,207,900 1,265,600 1,531,300 878,000 1,726,100Dividend payout Ratio 2.44 2.25 2.38 2.47 1.96 General Mills is adopting a several strategies for the policy payout. First the company opted for a share split in June 2010 of 2 for 1. The dividend has been continuously distributed from 2008 to 2009, while it went respectively from $526,7 million to $800,1 million. Moreover, the corporation decrease gradually the amount of shares repurchased that went from $1.335 million to $16.4 million. The decrease is principally due to the fact that the company assumes that share price has reached the pick point, especially after the drop in price that happened in 2008 and 2009. Also, another fact that attracts the attention is the increasing earning per share ratio that shows that the company is profitable and every year registering good performance.

This figure represents the trend in share price for both companies7. The trend of both companies is steadily increasing from January 2008, with sometimes making some corrections, but returns back to growth. Tyson Foods has experienced a good year after registering a 100% growth from the beginning of 2013 until February 2014. Tyson’s policy payout by distributing dividends and repurchasing share has an serious impact on the share price. While from the other side, General Mills seems to maintain its price but with a shy increase.

Conclusion :After

7 General Mills represents the red line; Tyson Foods represents the blue line