Sure Dividend

Published October 1^st, 2018, spreadsheet updated weekly
By Ben Reynolds, Bob Ciura, & Nick McCullum

Individual products, businesses, and even entire industries (newspapers, typewriters, horse and buggy) go out of style and become obsolete.

Perhaps more than any other industry, agriculture is here to stay.  Agriculture started around 14,000 years ago.  It’s a safe bet we will be practicing agriculture far into the future.

And, the growth of the global population is tied to increasing agricultural efficiency.  The agricultural revolution allowed greater population growth (and precluded the industrial revolution).

As the global population grows, so does the need for improved agricultural production.  This creates a long-term demand driver for agricultural stocks.

You can download the complete list of all 37 agricultural stocks at the link below.

Investing in farm and agriculture stocks means investing in an industry that:

1. Has stable long-term demand
2. Has withstood the test of time, and is extremely likely to be around far into the future
3. Benefits from advancing technology

This article analyzes 10 of the best agricultural stocks in detail.  You can quickly navigate the article using the table of contents below.

Table of Contents

• Opening Thoughts
• Agriculture Stocks Table
• Best Agriculture Stock #10:  Calavo Growers (CVGW)
• Best Agriculture Stock #9:  AGCO Corporation (AGCO)
• Best Agriculture Stock #8:  Bunge Limited (BG)
• Best Agriculture Stock #7:  Fresh Del Monte Produce (FDP)
• Best Agriculture Stock #6:  The Mosaic Company (MOS)
• Best Agriculture Stock #5:  Scotts Miracle-Gro (SMG)
• Best Agriculture Stock #4:  CF Industries Holdings (CF)
• Best Agriculture Stock #3:  Archer Daniels Midland (ADM)
• Best Agriculture Stock #2:  Caterpillar (CAT)
• Best Agriculture Stock #1:  Deere & Company (DE)
• Final Thoughts

Agriculture Stocks Table

The sortable table below shows the complete list of 37 agricultural stocks.

Additionally, you can download a sortable Excel spreadsheet of these agricultural stocks at the link below.

We have qualitatively ranked our 10 favorite agriculture stock picks below.  These rankings are based primarily on quality, and are qualitative in nature.  Interested investors should view this as a starting off point to more research.

Best Agriculture Stock #10: Calavo Growers Inc. (CVGW)

Calavo Growers operates in the farm products industry. It was founded in 1924. Today, it markets and distributes avocados and other foods. The Fresh Products segment sizes, packs, and ripens avocados for delivery to its customers. The Calavo Foods segment procures and processes avocados into guacamole, and distributes it to customers. Lastly, its Renaissance Food Group produces and distributes a variety of healthy fresh packaged food products, such as tomatoes and papayas, through retail channels.

Calavo Growers earns a place on this list because of its growth story. Avocados are a “super food”, and are loaded with nutrients. As such, it has great appeal to health-conscious consumers. This is an emerging trend in the United States; consumers are becoming much more aware of what they are eating. Fresher, healthier foods like avocados are seeing strong demand as a result. According to Calavo, consumption of avocados in the United States has risen at an 8% annual rate over the past 10 years.

This undeniable trend is evident in Calavo’s huge growth over the past decade. In fact, from 2006 to 2017, Calavo’s sales increased nearly 300%. Earnings rose by more than five-fold in the same period.

Source: Investor Relations

Calavo expects record sales in 2018, thanks in large part to 20% expected growth in avocado volumes. Earnings-per-share are expected to increase at a double-digit rate.

Household penetration of avocados is still below other common fruits, which means Calavo has a long runway of future growth up ahead. Calavo is an industry leader, with durable competitive advantages. It has more than 15 production and distribution facilities throughout the United States, giving the company the opportunity for continued growth in the years ahead.

Best Agriculture Stock #9: AGCO Corporation (AGCO)

AGCO Corporation manufactures agricultural machinery, such as tractors, combines, self-propelled sprayers, hay tools, forage equipment, seeding and tillage equipment, grain storage, and protein production systems. It has a variety of brands, some of which include Challenger, Fendt, Massey Ferguson, GSI, and Valtra. Approximately 24% of the company’s sales are derived from North America, while the largest geographic segment is Europe & the Middle East, which comprises 60% of revenue. The remainder of the company’s sales are derived from South America, Asia-Pacific, and Africa.

Most geographic regions are performing well for AGCO right now. Over the first half of 2018, sales increased 14% in Europe & the Middle East, 5% in Asia-Pacific, and 27% in North America. The only geographic region to post declining sales was South America, which was down 6% over the first half of the year. Overall, consolidated sales increased 14% through the first half.

Year-to-date retail units of tractors and combines have increased at strong rates throughout AGCO’s operating regions, except for tractors in South America.

Source: Earnings Presentation, page 4

Earnings-per-share increased 41% over the first half of 2018. There should be room for continued growth going forward. Economic growth in the U.S. and Europe is generally positive for large industrial manufacturers.  In addition, demand is growing for grain storage and protein production, particularly in the emerging markets, which is a positive indicator for AGCO.

The major risk for AGCO would be a recession. As a heavy machinery manufacturer, AGCO would be severely impacted by a recession.

Best Agriculture Stock #8: Bunge Limited (BG)

Bunge Limited was founded all the way back in 1818. Today, Bunge is a holding company. Its core business is to supply and transport agricultural commodities. It operates through the following segments: Agribusiness, Edible Oil Products, Milling Products, Sugar and Bioenergy, and Fertilizer.

The Agribusiness segment involves storage and transportation of agricultural commodities. The Edible Oil Products segment includes production and sale of vegetable oils, shortenings, margarines, and mayonnaise. The Milling Products segment produces wheat flours, bakery mixes, corn-based products, and rice. The Sugar and Bioenergy segment manufactures sugar and ethanol, while the Fertilizer segment produces and distributes fertilizer.

Bunge takes a spot on the list of top agriculture stocks because of its strong growth and extremely shareholder-friendly management team. The company is committed to returning lots of cash to shareholders each year. For example, from 2002 to 2017 Bunge raised its dividend by 11% per year, on average. In addition, Bunge has repurchased more than $1.2 billion of its own stock.

Source: Investor Presentation, page 8

Bunge generates a great deal of cash flow, which fuels its impressive cash returns to shareholders. Rising global populations are a long-term growth catalyst for Bunge, which will result in higher demand for agricultural commodities of all sorts. For 2018, the company expects adjusted earnings before interest and taxes (EBIT) of $1.3 billion, which would more than double last year’s EBIT of $600 million.

A major cost-cutting plan will help Bunge boost its profitability. It has focused on cuts to selling, general, and administrative costs, with great results so far. Bunge expects $150 million in cost savings by the end of 2018, 50% more than it originally anticipated. This will help the company boost its earnings growth, to continue raising dividends. The current dividend yield of 2.9% is particularly attractive for income investors.

Best Agriculture Stock #7: Fresh Del Monte Produce (FDP)

Fresh Del Monte is one of the world’s largest producers of fruit, and was founded in 1886. The company produces and distributes fresh fruit and vegetables, primarily bananas, pineapples, non-tropical fruit, avocados, melons, tomatoes, vegetables, and more. The company also has a prepared food segment. Fresh Del Monte has greatly diversified its product portfolio in the past 20 years.

For example, in 1996 approximately 75% of the company’s sales were derived from bananas. Today, bananas represent less than half of sales, and the company has significantly broadened its product line.

Source: Investor Presentation, page 13

This expanded focus will serve the company well. Fresh Del Monte has a positive growth outlook. First, the rising global population is a huge catalyst. According to the company, by 2050 demand for food is expected to rise 70% from current levels. The global population is expected to reach 9 billion by then. Feeding the world’s growing population is a major challenge that will need to be solved, and Fresh Del Monte is set to capitalize.

The company’s durable competitive advantages will fuel its growth. Fresh Del Monte has 47 worldwide distribution centers and 19 fresh cut operations around the world. It also has 11 owned vessels, and another seven chartered vessels. Fresh Del Monte is uniquely positioned to serve the world’s growing population and demand for food. Fresh Del Monte’s net sales increased 9% over the first half of 2018.

Fresh Del Monte stock is reasonably valued, with a price-to-earnings ratio of 15. The stock also has a 1.6% dividend yield, which will add to shareholder returns. Investors can reasonably expect high single-digit earnings growth on an annual basis going forward. Add it all up, and total expected returns could reach 10% per year over the next five years.

Best Agriculture Stock #6: The Mosaic Company (MOS)

Mosaic is one of the world’s leading crop nutrition companies, with a focus on potash and phosphate—two of the three most vital nutrients for crop production. The company mines and processes phosphate and potash minerals into crop nutrients, which it then ships to its customers via rail, barge and ocean-going vessels.

Manufacturers of agricultural commodities endured a challenging environment over the past few years. Rising global production, especially from China, caused prices to decline across a number of commodities, including corn, wheat, and soybeans. In addition, the threat of a trade war with China and tariffs continues to serve as an overhang.

However, Mosaic continues to perform well. It generates significant cash flow, which the company is using to invest in growth, and to pay down debt.

Source: Investor Presentation, page 13

Mosaic reduced debt by approximately $500 million over the course of 2018. This is especially important in a rising interest rate environment, which could make debt costlier. Mosaic’s growth investments have paid off. In the 2018 second quarter, Mosaic grew sales by 22% from the same quarter last year. Sales growth was due primarily to the acquisition of Vale Fertilizantes, as well as higher average sales prices in all three operating segments. Operating earnings more than doubled for the quarter.

Sales growth and cost cuts will continue to drive earnings growth, as will U.S. tax reform. After providing second-quarter financial results, Mosaic raised its guidance for the full year. The company now expects adjusted earnings-per-share in a range of $1.45 to $1.80, up from previous expectations of $1.20 to $1.60, due to accelerating momentum across its operating segments. At the midpoint of guidance, Mosaic expects 49% earnings growth for 2018.

Best Agriculture Stock #5: Scotts Miracle-Gro (SMG)

Scotts Miracle-Gro earns a place on this list because it is a strong business with significant competitive advantages. The company has over a dozen brands, and generates more than $2.6 billion in annual sales. SMG manufactures lawn and garden care products. Its family of brands includes Scotts, Miracle-Gro, Ortho, and more. Not only that, SMG owns a minority interest in TruGreen, the largest residential lawn care service business, and in Bonnie Plants, the largest retail marketer of edible gardening plants. SMG also has a subsidiary, The Hawthorne Gardening Company, which services the hydroponic growth segment.

These brands lead their respective categories, and SMG has the financial strength to advertise its brands to retain their leadership positions.

Source: Investor Presentation, page 10

SMG is off to a slow start to 2018. Sales declined 2% over the first three quarters of the fiscal year due to a slow start to the lawn and garden care season. However, unfavorable weather conditions this year should not affect the company’s long-term growth.

SMG is benefiting from the strong U.S. housing market. With a low unemployment rate and rising home prices, consumers are willing and able to spend more on their lawns and gardens. If the housing market does not enter a downturn over the next several years, SMG has a positive growth outlook going forward.

SMG expects up to 2% sales growth for 2018, and earnings-per-share of $3.70 to $3.90 for the full year. At the midpoint of guidance, the stock trades for a price-to-earnings ratio of 20.7. SMG shares are neither extremely cheap or significantly overvalued. Future returns could potentially reach 10% per year, if the company can grow earnings at a high single-digit rate. SMG has an attractive dividend yield of 2.8%.

Best Agriculture Stock #4: CF Industries Holdings (CF)

CF Industries is a fertilizer producer. Its key products include ammonia and urea ammonium nitrate (UAN). CF should benefit from sustained tailwinds. The company expects nitrogen demand to grow at about 2% per year, as agricultural demand is driven by population growth and increased protein consumption. At the same time, industrial demand will be driven by global GDP growth.

Source: Investor Presentation, page 15

CF earns a high ranking on this list for its compelling growth catalysts. On 8/1/18 the company reported strong second-quarter financial results. Revenue increased 15% due to volume growth and pricing increases. In addition, natural gas prices fell 13%, helping increase margins as the cost of sales decreased. Adjusted EBITDA soared 54%.

After incurring a couple of difficult years due to falling ammonia and UAN prices—the result of accelerated global production from places like China—the economics are finally starting to normalize. As a low-cost producer, CF simply needed to wait out the period of accelerated production. Companies producing at a loss could not keep it up forever, and CF focused on cutting costs during the downturn.

Now that the environment has reversed, CF is back to growth. It is optimally positioned to benefit from a return to higher fertilizer prices, especially because it has completed major growth projects in recent years. For example, CF invested heavily in its Donaldsonville and Port Neal expansion projects. These projects required a heightened level of investment by CF. The company spent $2.5 billion on capital expenditures in 2015, and over $2 billion in 2016.

But now that the projects are complete, CF’s capital expenditures are falling dramatically. Capital expenditures declined 22% over the first half of 2018. The company expects long-term annual capital spending in the range of $450 million. This will help boost cash flow even further, which helps support the company’s cash returns. CF has a dividend yield of 2.2%, and the company authorized a $500 million share repurchase through June 2020.

Best Agriculture Stock #3: Archer Daniels Midland (ADM)

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.

In recent years, Archer Daniels Midland has embarked on a number of acquisitions and divestitures to enhance its position in origination & transportation, processing and specialty ingredients.

Source: Investor Presentation, page 9

Archer Daniels Midland sources, transports, processes, and distributes a number of products. Its largest business is Corn Processing, where it converts corn into sweeteners, starches, and bioproducts. The Agricultural Services segment utilizes its extensive global grain elevator, transportation networks, and port operations to buy, store, clean, and transport agricultural commodities.

The Oilseeds Processing segment processes oilseeds, such as soybeans, cottonseed, sunflower seed, canola, rapeseed, and flaxseed. It processes these seeds into vegetable oils and protein meals. Meanwhile, the Wild Flavors and Specialty Ingredients (WFSI) segment manufactures, sells, and distributes flavors, colors, proteins, and emulsifiers.

Archer Daniels Midland is in a strong position to grow in the years ahead. Emerging markets such as China and India are growing at a high rate, which means diets are becoming more protein-based. This is expected to result in growing demand for meat going forward. Archer Daniels Midland expects global poultry and pork consumption to rise by 5.2% and 2.2% each year, respectively, through 2020. These trends would be a huge catalyst for Archer Daniels Midland’s corn and feed businesses.

Archer Daniels Midland has multiple competitive advantages. First, it is the largest corn processor in the world. Its extensive distribution network includes 500 crop procurement locations, 250 ingredient manufacturing facilities, and more than 30 innovation centers.

Archer Daniels Midland stock has a dividend yield of 2.7%, and the company has paid 86 years of uninterrupted dividends.  In addition, the company has increased its dividend every year for more than 25 consecitive years.  This makes Archer Daniels Midland the only agriculture stock that is also a Dividend Aristocrat.

Best Agriculture Stock #2: Caterpillar (CAT)

Caterpillar is a manufacturer of heavy machinery. It makes Earth-moving heavy machinery, which is a highly cyclical industry. Caterpillar is finally emerging from a very difficult few years, which were characterized by falling oil & gas and precious metals prices. Its large exposure to the oil and gas and mining industries resulted in a severe downturn for Caterpillar.

From 2014-2016, Caterpillar’s construction industry segment sales fell 24%. In response, Caterpillar launched a major restructuring, which allowed it to trim several billion dollars from its cost structure. This helped the company return to more recent earnings growth. Note the construction industry segment’s sharp recovery in sales and operating profit in 2017 and in the past 12 months, as shown in the following image.

Source: Morgan Stanley Conference Presentation, page 7

The positive momentum has continued to start 2018. In the most recent quarter, Caterpillar’s sales increased 24%, while adjusted earnings-per-share nearly doubled. The company is rewarding shareholders with strong cash returns. In the second quarter, Caterpillar repurchased $750 million of stock, and raised its dividend by 10%.

There is potential for continued growth in the years ahead. The rising global population is expected to be accompanied by increased urbanization. By 2040, Caterpillar estimates that 65% of the world’s population will live in cities, up from 55% currently. The corresponding need for infrastructure investment is expected to fuel rising demand for Caterpillar’s heavy machinery.

Caterpillar has a 1.8% dividend yield, and a projected 2017 dividend payout ratio of 50%. Distributing just half of annual earnings-per-share leaves plenty of room for high dividend growth rates, especially if earnings continue to recover from the industry downturn.

Best Agriculture Stock #1: Deere & Company (DE)

Taking the top spot on the list of the best agriculture stocks is Deere & Company, because it has the optimal mix of growth, value, and dividends. Deere stands to benefit from major global trends—specifically, the growing population and increasing demand for food. According to the company’s 2017 annual report, global demand for food is expected to double in the first half of this century. Deere, which manufactures farm equipment for the agriculture industry, will likely see sustained demand for many years as a result.

Deere operates two core segments, Agriculture & Turf and Construction & Forestry, with most of its sales derived from Agriculture & Turf equipment.

Source: Investor Presentation, page 17

The past few years have been difficult for Deere, as the company dealt with a severe industry downturn. A steep and prolonged decline in agriculture commodity prices resulted in falling farm incomes around the world. This, in turn, resulted in weaker demand for farming equipment, as farmers postponed or canceled orders for new equipment.

Fortunately, Deere successfully navigated the challenging climate with a strict focus on cost controls. This allowed it to maintain profitability, even during the industry downturn. Now that agriculture commodity prices have recovered, Deere has returned to impressive growth. For example, equipment sales increased 36% last quarter, which also set a company record for earnings-per-share. Worldwide net sales increased 29% through the first three quarters of 2018.

Net sales and revenues are expected to increase by about 26% for fiscal 2018. The company also expects net profits of about $2.36 billion. Deere is solidly profitable, which allows it to return cash to shareholders each year through dividends and share repurchases. Since 2004, Deere has utilized $16.8 billion for share buybacks, which reduced its share count by 35%. It also raised its dividend by 146% over that 14-year period. The current dividend yield is 1.8%.

Deere generates enough cash flow to reward shareholders with dividends and share repurchases, while also investing in future growth. Deere invested nearly $2 billion in research and development last year, to innovate new products. The company also acquired the Wirtgen Group for $5.3 billion, which was the largest acquisition in the company’s history. Wirtgen is a leading manufacturer of road construction equipment, which will expand and diversify Deere’s Construction & Forestry segment.

Deere has a strong balance sheet, excellent brand power, and a clear path to long-term growth. These factors make it the highest-quality agriculture stock today.

Final Thoughts

The agriculture industry is a compelling place to look for long-term stock investments.  That’s because the demand drivers of the industry make it extremely likely to be around far into the future.

We believe the 10 stocks examined in this article are the best within the industry.  Of these, Caterpillar, Deere & Company, and Archer-Daniels-Midland stand above the rest from a quality perspective thanks to their size, strength, and longevity.

Investors looking for metrics that matter on agriculture stocks can download the Excel spreadsheet below.