Thursday, May 7, 2015

Stock Analysis: Archer Daniels Midland

This article originally appeared on The DIV-Net on 6 May 2015.

Founded in 1898 and headquartered in Chicago, Illinois, Dividend Champion Archer Daniels Midland Company (NYSE:ADM) is engaged in the processing of oilseeds, corn, wheat, cocoa, and other agricultural commodities. The company manufactures protein meal, vegetable oil, corn sweeteners, flour, and other value-added food and feed ingredients, as well as biodiesel and ethanol.

ADM is the Consumer Staples sector winner and 7th ranked stock in the April 2015 edition of my 10 Dividend Growth Stocks article series. The company has an impressive 40-year streak of consecutive dividend increases and pays quarterly dividends of 28¢ per share in the months of March, June, September and December.

At the current price of $48.10 (22 April close) ADM yields 2.33%, which is below the 2.5% yield I look for according to my selection criteria. Given ADM's current annual dividend of $1.12 per share, the stock would need to trade at $44.80 to yield 2.5%.

The following chart plots ADM's price history for the past 10 years, as well as the stock's performance relative to the S&P 500. The stock has outperformed the S&P 500 by about 50%, reaching an all-time high of $53.91 on 3 December 2014.

Source: Scottrade

Except for a brief period in 2008 when the stock price tumbled to below $20 per share, ADM's dividend yield has not topped 3%. On several occasions, though, the yield touched or topped the 2.5% level:

Source: Dividend.com

Although ADM's current yield is not quite what I'm looking for, the stock's annual dividend growth rate is! ADM has maintained an annual dividend growth rate of about 12% over a 10-year period, with some acceleration happening in recent years:

ADM Dividend Growth Rate
 1 Year  3 Year  5 Year  10 Year 
26.3%15.7%11.4%12.1%

An investment in ADM 10 years ago would have produced total returns of 168% and a dividend payback percentage of 30%! Not shown in the total return calculator below is the impact of dividend increases on YoC, which, after 10 years of dividend increases, would be 6.58%.

Source: GuruFocus

Analysis of ADM


ADM is trading at a premium of about 6% to my fair value estimate of $45.40. For comparison, MorningStar's fair value estimate is $44.00 and S&P Capital IQ's fair value estimate is $47.50.

The following table provides some key statistics:


ADM passes the following of my selection criteria:
  • A streak of at least 5 years of dividend increases (40 years)
  • Chowder rule: Dividend yield plus 5-year CAGR exceeds 8% (13.71%)
  • Earnings per share (EPS) percentage payout is less than 40% (32.65%)
  • Debt to equity ratio is below 50% (29%)
  • Price to earnings ratio (P/E) is less than 20 (TTM 14.02x and Forward 13.22x)
  • P/E to annual EPS growth (PEG) ratio is less than 2 (1.54)
  • 5-year CAGR is at least 10% (11.38%)
  • Reasonable confidence in continued dividend growth (Yes)
ADM fails the following of my selection criteria:
  • Dividend yield exceeds 2.50% (2.33%)
  • Price discount is at least 5% of fair value estimate (-5.61%)
Based on these statistics, ADM earns 5 out of a possible 7 stars: (*****--)

The following chart shows ADM's dividend payments and EPS over the last 10 years. It is evident that the company's growing dividend is sufficiently covered:


Other ratings for ADM


 MorningStar Rating (***--)
 S&P Capital IQ's Stock Report (***--) Hold 
 The Motley Fool's CAPS Rating  (*****)
 Thomson Reuters StockReport+ (6/10) Neutral 
 Zacks Rank (Style Scores*) 3-Hold (C•A•B)
  *(Growth • Value • Momentum)

Concluding Remarks


ADM has an impressive track record of paying and increasing dividends. Despite this track record, the stock doesn't seem to be very popular among dividend growth investor (DGI) bloggers, at least not bloggers that have public portfolios.

In fact, ADM is not in the Bloggers' Portfolio, a portfolio of the 52 most popular dividend growth stocks trading on U.S. exchanges, which I compiled last year based on the public portfolio of 61 DGI bloggers. Perhaps one of the reasons is ADM's yield, which consistently seems to stay below 2.5% despite a 10-year annual dividend growth rate averaging 12%.

ADM last reported earnings on 3 February 2015, with adjusted EPS of $1.00 and adjusted segment operating profit of $1.1 billion. These numbers topped the year-ago quarter's numbers by 5% and 8%, respectively. For the 2014 calendar year, ADM achieved adjusted EPS of $3.20, up 37% from last year, with profits totaling $2.25 billion.

That ADM is shareholder friendly is not in doubt. During the fourth quarter, ADM repurchased 9.4 million shares and the company is targeting $1.5 to $2.0 billion of share repurchases in 2015.  The board of directors declared a new quarterly dividend of 28¢ per share, up 16.67% from the previous quarterly dividend of 24¢.

ADM's financial performance may be adversely affected due to unfavorable foreign currency exchange. The company has a significant presence in the international market, so standard risks apply, including the potential impact of political and economic instability.

ADM has significant competition in the market in which it operates. Competitors include privately-owned Cargill, Inc, Bunge (NYSE:BG), Ingredion (NYSE:INGR), Tyson Foods (NYSE:TSN) and General Mills (NYSE:GIS). Many products bought and sold by ADM are global commodities or derivatives of global commodities, which are highly price competitive. Volatile commodity prices could impact ADM's revenues and margins.

Other risks include fluctuation in energy prices, regulatory compliance, adverse weather conditions, and supplier-side manufacturing delays.

Overall, I like the long-term prospects of the company, but I prefer to buy stocks at a discount of at least 5% to my fair value estimate. This means ADM's share price would need to drop by about 10% to $43.24 before I'd really be interested. At that price, the stock would yield 2.59% and earn a 7-star rating.

Full Disclosure: I don't own any shares of ADM and I'm not planning on buying any shares soon.

2 comments :

  1. ADM seems like it is a good buy right now. Lots of bloggers have been a buzz about ADM. Have you bought this stock yet or are you waiting for a dip before purchase?

    ReplyDelete
    Replies
    1. I'm still waiting for the dip, but it seems like I'm missing the boat! ADM has crept up in recent days. Oh well, perhaps I'll get another chance soon...

      Delete

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