Food.
It’s the backbone of human civilization. Without food, we can’t survive.
As such, it can be incredibly profitable to invest in companies that provide value-added services along the supply chain.
For instance, take a look at Archer Daniels Midland Company (ADM).
This is a company that’s been around since the late 1800s and has grown into a behemoth in the agricultural industry – its market cap is north of $32 billion.
[ad#Google Adsense 336×280-IA]They process a number of agricultural commodities including corn, oilseeds, wheat, and cocoa.
And they manufacture end products like corn sweeteners, flour, biodiesel, and ethanol.
In addition, they provide value-added food and feed ingredients.
For instance, they process soybeans, which is a key component in animal feeds.
So they’re providing this huge value in the food and energy industry that’s vital.
And that position has enabled them to become an incredibly successful company that’s growing at a substantial rate.
Revenue is up from $36.596 billion in fiscal year 2005 to $81.201 billion in FY 2014. That’s a compound annual growth rate of 9.26% over that stretch.
Earnings per share increased from $1.53 to $3.43 over this stretch, which is a CAGR of 9.38%. Consistent results here. Obviously, agricultural processing is a fine business to be in.
S&P Capital IQ is calling for EPS to compound at an annual rate of 10% over the next three years, which is in line with their historical average.
What’s just as impressive – or perhaps more so – as their growth rate is the consistent nature of the firm to share the growing profits with shareholders.
The company just very recently announced a 16.7% increase in its dividend, upping the payout from $0.24 to $0.28 quarterly per share. This marks the 40th consecutive year in which ADM has increased its dividend. Few companies out there have built up this kind of track record.
This track record means they’re a “Champion” on David Fish’s Dividend Champions, Contenders, and Challengers list, whereby David tracks well over 600 stocks with at least five consecutive years of dividend raises under their respective belts.
And the dividend raises have been substantial – ADM sports a 10-year dividend growth rate of 12.3%.
The stock now yields 2.35%, which is fairly attractive here in this market.
That yield also compares well to ADM’s five-year average.
The recent dividend increase means management is confident about its cash flow and ability to return some of that to shareholders, as evidenced by the low payout ratio of 32.7%.
The company’s balance sheet also speaks to its quality. Using a low amount of leverage, the long-term debt/equity ratio is currently 0.2 and the interest coverage ratio is 9. The interest coverage ratio could be improved a bit, but $5.5 billion in long-term debt or a company of this size is really a non-issue.
Profitability is sound, considering the industry. The company has posted net margin that has averaged 2% over the last five years and return on equity of 8.67% over that period. Unfortunately, this just isn’t a high-margin industry.
The fundamentals across the board are really solid here. The dividend track record is perhaps what pops out the most for me, however. 40 consecutive years of dividend raises, and the company is still growing it at a very attractive rate. I don’t know how, as a shareholder, you’re not ecstatic with that.
The company’s competitive position is about as entrenched as it gets, as they’re a major processor and supplier in the industry. And as the world’s protein needs increase over the next few decades, ADM’s soybean processing should enable continued and sustained growth for the company.
Due to their quality, position, and dividend growth record, I’m considering this as an investment for my Freedom Fund.
Food and feed isn’t going anywhere, which means this is somewhat of a low-risk investment. However, the company is exposed to potentially wild swings in commodities, as the commodities it deals in can vary in price rather substantially, even over short periods of time, due to the effects of supply and demand.
Shares in ADM are available for a P/E ratio of 13.83 right now, which compares well to ADM’s five-year average of 15.2. In addition, that’s well below the broader market’s P/E ratio of 18.
I valued shares using a dividend discount model analysis with a 10% discount rate and a 7.5% long-term growth rate. That rate appears fair considering its track record and quality. Recent dividend raises have been well in excess of this number and a low payout ratio means it’s likely that will remain so. As such, it appears that this allows for a margin of safety. The DDM analysis gives me a fair value of $48.16, indicating shares are roughly fairly valued right now.
Bottom line: Archer Daniels Midland Company (ADM) is a behemoth in the agriculture industry with exposure multiple commodities across the supply chain. Many of their products are vital to the agriculture food chain, which gives them incredible clout, though not without the drawback of being a price taker. Their 40-year dividend growth streak is not only healthily intact, but the company continues to grow the dividend at an astounding rate. Shares appear fairly priced here, which could be an opportunity to invest in one of the oldest and highest-quality agricultural firms around.
— Jason Fieber, Dividend Mantra
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