Published June 11th, 2015
Monsanto (MON) is one of the world’s largest agricultural chemicals companies. Monsanto was founded in 1901 and has grown to reach a market cap of $54 billion.
Monsanto is a member of the Dividend Achievers Index. The company has paid steady or increasing dividend payments each year since 2000. The Dividend Achievers Index is comprised of businesses with 10 or more consecutive years of dividend payments. You can see the current list of all 238 members of the Dividend Achievers Index here.
This article will look at Monsanto’s current events, competitive advantage, and future growth prospects. The company will be examined using The 8 Rules of Dividend Investing. The 8 Rules of Dividend Investing take a systematic approach to building a high quality dividend growth portfolio.
Monsanto operates in 2 primary segments; Seeds & Genomics, and Agricultural Productivity. The Seeds & Genomics segment generated 56% of revenue for the company in its most recent quarter, while the Agricultural Productivity segment generated the remaining 44% of sales. The Agricultural Productivity segment sells the company’s flagship ‘Roundup’ brand.
The Seeds & Genomics segment is further divided into 5 divisions. Each division is shown below, along with the percentage of total revenue it generated for Monsanto in the company’s most recent quarter:
- Corn seed and traits: 32% of total sales
- Soybean seed and traits: 14% of total sales
- Cotton seed and traits: 3% of total sales
- Vegetable seeds: 5% of total sales
- All other crop seeds & traits: 2% of total sales
Corn and soybeans are by far the most important crops for Monsanto. Together, these two crops account for 46% of the company’s total revenue.
At its core, Monsanto generates profits by helping farmers improve yields. The company does this through developing higher yielding seeds that are resistant to insects and herbicides. Roundup Ready seeds are resistant to the herbicide Roundup. This allows farmers to kill weeds with Roundup without killing crops.
There is misinformation that genetically modified crops do not increase yields. This is untrue. Since the advent of agriculture humans have bred crops to generate the highest yields possible. The image below shows ancient corn versus modern corn for an example of how successful we have been at increasing crop yields through history.
Monsanto’s competitive advantage comes from its unique business model. The company sells Roundup Ready seeds that are resistant to the herbicide Roundup. Monsanto also sells Roundup. Farmers use Monsanto’s seeds and herbicide to increase yields and profits.
The durability of Monsanto’s competitive advantage depends on the strength of the company’s research and development department. The company has spent over $1.5 billion on research and development in each of its last 3 years. Smaller competitors cannot match the massive research and development budget of Monsanto.
Growth Prospects & Current Events
Monsanto has delivered rapid earnings-per-share growth of 19.4% a year over the last decade. The company’s dividend payments have grown at 20.2% a year over the last decade. Despite amazing 10 year results, the company’s growth has slowed in recent years. Earnings-per-share have grown at just 3.3% a year since 2009.
Monsanto’s management has plans to double earnings-per-share by 2019. The company has seen strong demand this year for INTACTA soybeans as well as for Bollgard II Xtend Flex cotton. 2016 should also be a strong year for Monsanto as the company rolls out its Roundup Ready 2 Xtend soybeans. Monsanto’s full product pipeline and solid growth projections from management bode well for shareholders.
Monsanto posted less-than-stellar results in the second quarter of fiscal 2015. The company saw earnings-per-share decline 7.9% due to negative currency effects and shrinking corn acreage. Acreage is expected to continue declining due to low corn prices. The image below shows the decline in corn prices over the last year.
While a strong dollar and low corn prices create negative headwinds for Monsanto, the company will benefit when these trends reverse. Despite a weak second quarter and negative headwinds, Monsanto’s outlook still points to earnings-per-share growth of 11% for fiscal 2015.
Monsanto is currently trading for a forward price-to-earnings multiple of 17.1. The company appears to be trading around fair value given its volatile growth. Continued consumer backlash against GMO foods and herbicides put a dark cloud around Monsanto.
So far, negative press has not impacted the company’s sales. If the trend toward non GMO food accelerates substantially then Monsanto could see declining profits. The company’s current valuation multiple appears to account for potential risks in the business.
Monsanto showed rapid growth through the Great Recession of 2007 to 2009. The company’s earnings-per-share growth through the Great Recession is shown below:
- 2007 Earnings-per-share of $1.98 (new high at the time)
- 2008 Earnings-per-share of $3.39 (new high at the time)
- 2009 Earnings-per-share of $4.41 (new high at the time)
Monsanto’s business is not impacted by recessions. The company’s rapid growth through the Great Recession was not because of recessionary effects. Rather, Monsanto’s growth is uncorrelated with the business cycle.
The 8 Rules of Dividend Investing
The sections below will compare Monsanto to other businesses with a long history of dividend increases using the 5 Buy Rules from The 8 Rules of Dividend Investing. Each rule has a short ‘why it matters’ section, explaining why the rule is relevant.
Rule 1: 25+ Years of Dividends Without A Reduction
Monsanto has paid steady or increasing dividends since 2000. The company does not have the required 25+ years of dividend payments without a reduction to pass the first rule of dividend investing. Nevertheless, the company will be compared to businesses with 25+ years of dividend payments without a reduction to show where Monsanto would rank using The 8 Rules of Dividend Investing.
Why it matters: The Dividend Aristocrats (stocks with 25+ years of rising dividends) have outperformed the S&P 500 over the last 10 years by 2.88 percentage points per year.
Source: S&P 500 Dividend Aristocrats Factsheet
Rule 2: Dividend Yield
Monsanto’s current dividend yield of 1.7% is below the S&P 500’s dividend yield. The company’s below-average dividend yield is the 131st highest out of 167 businesses with 25+ years of dividend payments without a reduction.
Why it Matters: Stocks with higher dividend yields have historically outperformed stocks with lower dividend yields. The highest-yielding quintile of stocks outperformed the lowest-yielding quintile by 1.76 percentage points per year from 1928 to 2013.
Source: Dividends: A Review of Historical Returns
Rule 3: Payout Ratio
Monsanto has a payout ratio of 39.7%. The company’s conservative payout ratio gives management room to grow dividends faster than earnings-per-share over the next several years. Monsanto has the 56th lowest payout ratio out of 167 businesses with long dividend histories.
Why it Matters: High-yield, low-payout ratio stocks outperformed high-yield, high-payout ratio stocks by 8.2 percentage points per year from 1990 to 2006.
Source: High Yield, Low Payout by Barefoot, Patel, & Yao, page 3
Rule 4: Long-Term Growth Rate
Monsanto has experienced rapid growth over the last decade. The company has grown revenues-per-share at 11.6% a year over this time frame. Monsanto has the 7th highest growth rate out of 167 businesses with 25+ years of dividend payments without a reduction.
Why it Matters: Growing dividend stocks have outperformed stocks with unchanging dividends by 2.4 percentage points per year from 1972 to 2013.
Source: Rising Dividends Fund, Oppenheimer, page 4
Rule 5: Long-Term Volatility
Monsanto’s uneven growth and dependence on grain prices give it higher than average stock price volatility. Monsanto has a stock price standard deviation of 34.7%, which is the 125th lowest out of 167 businesses with 25+ years of dividend payments without a reduction.
Why it Matters: The S&P Low Volatility index outperformed the S&P 500 by 2 percentage points per year for the 20-year period ending September 30th, 2011.
Source: Low & Slow Could Win the Race
Monsanto would rank at 61 out of 167 using The 8 Rules of Dividend Investing if the company had a long enough dividend history to pass the first rule of dividend investing . Monsanto’s rapid historical growth rate helps it to rank as high as it does. The stock’s low dividend yield and high price volatility are its biggest drawbacks.
From a business perspective, Monsanto has a strong competitive advantage. The company’s research and development department creates new seeds and herbicides which drive growth for the company. Monsanto is a hold at this time. Investors looking for exposure to the agriculture industry will likely do better elsewhere.