Shopify and Amazon both rate pet-related articles as one the hottest e-commerce products. Consumers are willing to spend a lot of money to ensure that our four-legged friends enjoy live by both having a secure environment, but also that they eat well. Actually, the pet food industry grew by 10% during 2016 and the future doesn’t look any worse either.
As a result of weak quarters and lowering profits, General Mills (NYSE:GIS) newly announced that they will acquire Blue Buffalo Pet Products Inc. (NYSE:BUFF) for $8 billion. This acquisition will boost General Mills pipeline and make an entry in a very future oriented segment. Should investors be surprised? Likely not. General Mills is actually one of the most dividend-sustainable companies in the world. The company has paid dividends since 1885 which means General Mills is one of the few companies on the Dividend Zombie list – Companies that have paid dividend for more than 50 year.
However, Wall street didn’t take this acquisition so lightly. The share price took a steep dive, falling as much as 4% after the news about the acquisition. The most likely reason is that General Mills now added a lot more depth to their balance. Standard & Poor – the financial credit rating firm – downgraded the company’s financial secure to a BBB, with the following comment:
“The downgrade reflects our belief that General Mills’ pro forma credit protection measures will deteriorate following this acquisition and will remain weaker than our prior expectations for several years after the close of the transaction,”
While the comment might make some investors frightful, they oath to now that debt is often a necessity for future growth. The management of General Mills has shown for decades that they are able to balance leverage and equity. As of now, the debt – to – equity is 2.12, which is in line with what investors oath to look at. Most preferably, a ratio around 1 or less is amazing, but sometimes companies need leverage in order to grow and stay ahead of the game.
In total, it looks like General Mills is about to redefine their pipeline once more, as they have done successfully for many years. Investors should take notice of the lower credit rating, but it makes little since to sell shares now that management shows that they are eager to grow and stay in the game.
The author owns shares in General Mills.