Updated on February 8th, 2023 by Felix Martinez
At Sure Dividend, we are big believers that the best stocks to buy and hold to generate long-term wealth have a number of qualities in common. First, they are strong businesses that lead their respective industries, with the ability to generate consistent profits year after year–even during recessions.
Not only that, they also have shareholder-friendly management teams that are dedicated to raising their dividends each year. This is why we advocate investing in the Dividend Aristocrats, a group of 68 companies in the S&P 500 Index, with at least 25 consecutive years of dividend increases.
You can download the full list of all 68 Dividend Aristocrats, along with several important financial metrics such as price-to-earnings ratios and dividend yields, by clicking on the link below:
Each year, we review all the Dividend Aristocrats. Next up is Archer Daniels Midland (ADM).
Archer Daniels Midland has increased its dividend each year for over 48 years in a row and has paid uninterrupted quarterly dividends to shareholders for nearly 90 years. The company’s dividend is also currently relatively safe, thanks to sound business fundamentals.
Fortunately, industry conditions have improved recently, which could pave the way for future growth for ADM.
Business Overview
Archer Daniels Midland was founded in 1902 when George A. Archer and John W. Daniels began a linseed-crushing business. In 1923, Archer-Daniels Linseed Company acquired Midland Linseed Products Company, which created Archer Daniels Midland.
Today, it is an agricultural industry giant. Archer-Daniels-Midland operates in 160 countries and generates annual revenue above $85.2 billion.
The company produces a wide range of products and services designed to meet the growing demand for food due to rising populations.
Source: Investor Presentation
It operates four business segments: Origination, Oilseeds, Carbohydrate Solutions, and Nutrition. The Oilseeds segment is Archer Daniels Midland’s largest.
Archer Daniels Midland is finally coming out of a prolonged downturn. The strong U.S. dollar and the decline in agricultural commodity prices, such as corn, weighed on the company’s profitability for several years.
The good news is, Archer Daniels Midland remained profitable throughout the industry downturn, thanks to cost controls. The company launched an aggressive cost-cutting program in 2015 that produced $200 million in annual run-rate cost savings by 2018.
Furthermore, industry conditions have finally improved, which is setting the stage for a return to growth. Archer–Daniels–Midland reported its fourth quarter and Full Year (FY) 2022 earnings results on January 26th, 2023. For the fourth quarter, adjusted earnings-per-share increased 23.9% year-over-year. Revenue increased by 13.6% for the fourth quarter. The adjusted EPS increased 51.3% for the entire year from $5.19 per share to $7.85.
Source: Investor Presentation
Growth Prospects
ADM has not been severely affected by the COVID–19 pandemic, as the company is considered an essential business. The management team is excited about its future outlook as it expects the first quarter to be another strong quarter, and the positive momentum will continue through 2022. They also expect strong growth in segment operating profit and another record year of EPS in 2023. However, we think that the earnings growth will slow down next year to a slight decrease as this is a cyclical industry.
All segments had a strong quarter result compared to the prior year. Ag Services executed well to deliver strong results. For example, the Ag services and oilseeds increased 46% year-over-year. Carbohydrate Solutions, however, saw negative year-over-year growth of -39%. Nutrition also had a negative growth in the fourth quarter.
Acquisitions are a significant driver of ADM’s historical growth. The company has acquired multiple various businesses over the past few decades to boost its growth.
Source: Investor Presentation
Archer Daniels Midland also frequently divests low-growth businesses to improve its portfolio further. In total, the company has taken a number of actions to right the ship over the past several years. We expect 5% annual earnings-per-share growth over the next five years for ADM.
Competitive Advantages & Recession Performance
Archer Daniels Midland has built significant competitive advantages over the years. It is the largest processor of corn in the world. This gives way to economies of scale and efficiencies in production and distribution.
The company has a $45.2 billion market capitalization, making it a large-cap stock. It is an industry giant with ~453 crop procurement locations, 320 food and feed processing facilities, and 61 innovation centers.
At its innovation centers, the company conducts research and development on responding more effectively to changes in customer demand and improving processing efficiency. Archer Daniels Midland’s unparalleled global transportation network serves as a huge competitive advantage.
The company’s global distribution system provides the company with high margins and barriers to entry. In turn, this allows Archer Daniels Midland to remain highly profitable, even during industry downturns.
Profits held up, even during the Great Recession. Earnings-per-share during the Great Recession are below:
- 2007 earnings-per-share of $2.38
- 2008 earnings-per-share of $2.84 (19% increase)
- 2009 earnings-per-share of $3.06 (7.7% increase)
- 2010 earnings-per-share of $3.06
Archer Daniels Midland’s earnings-per-share increased in 2008 and 2009, during the Great Recession. Very few companies can boast such a performance in one of the worst economic downturns in U.S. history.
The reason for Archer Daniels Midland’s remarkable durability in recessions could be that grains still need to be processed and transported, regardless of the economic climate. There will always be a certain level of demand for Archer Daniels Midland’s products. From a dividend perspective, the payout looks quite safe.
Valuation & Expected Returns
Based on the expected 2023 EPS of $6.75, ADM shares trade for a price-to-earnings ratio of 10.6. Archer–Daniels–Midland has been valued at a price-to-earnings multiple of 15.5 over the last decade. Our fair value P/E is 15, meaning the stock is undervalued.
An increasing valuation multiple could generate 2.5% annual returns for shareholders over the next five years. Future returns will also be derived from earnings growth and dividends. We expect Archer Daniels Midland to grow its future earnings by ~5% per year through 2028, and the stock has a current dividend yield of 2.2%.
In this case, total expected returns are 9.7% per year over the next five years, a solid risk-adjusted rate of return for Archer Daniels Midland stock.
Final Thoughts
Archer Daniels Midland encountered a difficult operating environment over the past years. However, the past three years has been great for the company’s earnings.
With that said, the company has a long history of navigating through challenging periods. It has continued to generate profits and reward shareholders with rising dividends along the way.
The stock trades at an undervalued valuation and pays a 2.2% dividend yield, plus annual dividend increases. As a result, Archer Daniels Midland appears to be a strong holding for dividend growth investors.
If you are interested in finding more high-quality dividend growth stocks suitable for long-term investment, the following Sure Dividend databases will be useful:
- The 20 Highest Yielding Dividend Aristocrats
- The Dividend Kings List is even more exclusive than the Dividend Aristocrats. It is comprised of 40 stocks with 50+ years of consecutive dividend increases.
- The 20 Highest Yielding Dividend Kings
- The Dividend Achievers List: a group of stocks with 10+ years of consecutive dividend increases.
- The Dividend Champions List: stocks that have increased their dividends for 25+ consecutive years.
Note: Not all Dividend Champions are Dividend Aristocrats because Dividend Aristocrats have additional requirements like being in The S&P 500. - The Dividend Contenders List: 10-24 consecutive years of dividend increases.
- The Dividend Challengers List: 5-9 consecutive years of dividend increases.
- The Monthly Dividend Stocks List: contains stocks that pay dividends each month, for 12 payments per year.
- The 20 Highest Yielding Monthly Dividend Stocks
- The High Dividend Stocks List: high dividend stocks are suited for investors that need income now (as opposed to growth later) by listing stocks with 5%+ dividend yields.
The major domestic stock market indices are another solid resource for finding investment ideas. Sure Dividend compiles the following stock market databases and updates them monthly: