(or Archer-Daniels-Midland Dividend Stock Analysis, if the above title is too strong)
This is a guest post written by Ben Reynolds at Sure Dividend. Sure Dividend helps individual investors built portfolios of high quality dividend growth stocks trading at fair or better prices.
DivHut purchased Archer-Daniels-Midland (ADM) stock this month for his taxable account:
“I have added to my taxable account 22.4931 shares at $35.57 for a total investment of $800.00 in Archer-Daniels-Midland Company (ADM). With this recent purchase my taxable account holdings in ADM now totals 90.4118 shares for a value of $3,201.48.”
It’s easy to see why DivHut was drawn to Archer-Daniels-Midland; the company is a Dividend Aristocrat with an above-average 3.3% dividend yield. Archer-Daniels-Midland has increased its dividend for 40 consecutive years, and paid uninterrupted dividends for 83 consecutive years.
Moreover, the stock is on sale. Archer-Daniels-Midland stock has fallen to prices not seen since the last half of 2013. The company is currently trading for a price-to-earnings ratio of just 11.4.
We will discuss Archer-Daniels-Midland’s valuation in detail later on in this article. The company’s operations are analyzed below.
Archer-Daniels-Midland Business Overview
Archer-Daniels-Midland operates in 4 segments. Each segment is shown below along with the percentage of total operating income through the first 9 months of ADM’s fiscal 2015:
- Oilseeds Processing: 49% of operating income
- Agricultural Services: 21% of operating income
- Corn Processing: 19% of operating income
- WILD Flavors & Specialty Ingredients: 10% of operating income
The Oilseed Processing segment originates, crushes, processes, and merchandises oilseeds which include soybeans, cottonseed, sunflower seeds, canola, rapeseed, and flaxseed into vegetable oil and protein meal.
The Corn Processing segment converts corn into sweeteners, starches, and bio products (ethanol).
Archer-Daniels-Midland’s Agricultural Services segment buys, stores, cleans, and transports agricultural commodities.
The WILD Flavors segment was created at the beginning of 2015 to house the company’s flavorings and specialty ingredient operations which include specialty proteins, emulsifiers, and various vitamins.
Archer-Daniels-Midland Is An Industry Leader
Archer-Daniels-Midland has a market cap of over $20 billion after its large price declines (the stock is down over 30% this year). The company’s biggest competitor, Bunge Limited (BG) has a market cap of $9 billion – less than half the size of Archer-Daniels-Midland.
Archer-Daniels-Midland is the industry leader in the farm products industry, and it isn’t particularly close.
The company’s size gives it a notable competitive advantage over its competitors. Archer-Daniels-Midland’s distribution network is the ‘gold standard’ in the farm products industry. The company’s distribution network is detailed below:
- 300 processing plants (281 owned, 19 leased)
- 466 procurement facilities (413 owned, 53 leased)
- ~250 warehouses and terminals (all owned)
- 39 innovation centers (all owned)
- ~2,600 barges (2,100 owned, 500 leased)
- 28,100 rail cars (13,500 owned, 14,600 leased)
- 600 trucks (300 owned, 300 leased)
- 1,300 trailers (all owned)
- 41 ocean vessels (9 owned, 32 leased)
Stock Sell Off & Valuation
As mentioned above, Archer-Daniels-Midland stock has declined over 30% this year. The sell-off is due to falling grain prices. The company’s earnings and growth are tied to grain prices in the short term. Grain prices fluctuate. As a result, Archer-Daniels-Midland stock is more volatile than an industry leader with a strong competitive advantage would be otherwise.
Prior to the Great Recession Archer-Daniels-Midland stock traded for an average price-to-earnings ratio over 15. In 2013 and 2014 together, the company traded for an average price-to-earnings ratio over 15. I believe a fair price-to-earnings multiple for Archer-Daniels-Midland is at least 15.
The company is currently trading for a price-to-earnings multiple of 11.4. Based on this, fair value for Archer-Daniels-Midland stock is likely around $45 a share. The stock is currently trading for around $34 a share – implying more than 30% upside.
The catalyst for Archer-Daniels-Midland is rising grain prices. If grain prices rise, the company will likely see both earnings and its price-to-earnings multiple rise as well. This will result in solid gains for shareholders who bought in at low prices.
Archer-Daniels-Midland performed especially well through the Great Recession of 2007 to 2009. The company’s business model is not heavily dependent upon the greater economy.
Archer-Daniels-Midland is one of the few stocks that was able to raise its dividend payments each year through the Great Recession of 2007 to 2009. The company’s earnings-per-share through this difficult time period are shown below:
- 2007 earnings-per-share of $2.38
- 2008 earnings-per-share of $2.84
- 2009 earnings-per-share of $3.06
Archer-Daniels-Midland Growth Prospects
Archer-Daniels-Midland’s management should be applauded for excellent capital allocation. The company has reduced its share count by over 5% in 2015 – when share prices are depressed.
Share repurchases done when a stock is undervalued create value for shareholders. It’s like buying a dollar for 3 quarters.
The company is working to build a more stable business model. The WILD Flavors acquisition gives Archer-Daniels-Midland greater exposure to the more stable (and higher margin) specialty flavorings and additives market.
The long-term growth driver for Archer-Daniels-Midland is increasing global food consumption. A growing global population means more agricultural products will need transporting and processing. As the industry leader, Archer-Daniels-Midland stands to benefit from this long-term trend.
Archer-Daniels-Midland has delivered rapid growth over the last decade and a half. The company has compounded earnings-per-share at 13.6% a year and dividends-per-share at 12.5% a year from 1999 through 2015 (using expected 2015 earnings-per-share of $3.15).
Archer-Daniels-Midland is experiencing short term headwinds, but has favorable trends going for it over the long run.
The company is very likely undervalued at current prices. In addition, Archer-Daniels-Midland offers shareholders an above-average dividend yield of 3.3%.
The company also scores high marks for safety – as exemplified by excellent performance through the Great Recession. The company is also conservatively financed. With just ~$7 billion in total debt and ~$6 billion in cash on its balance sheet, Archer-Daniels-Midland has plenty of ‘dry powder’ for more acquisitions or share repurchases.
Archer-Daniels-Midland’s above average yield, solid growth prospects, and industry leading status give it a high rank using The 8 Rules of Dividend Investing.