Updated on April 2nd, 2021 by Bob Ciura
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 65 companies in the S&P 500 Index, with at least 25 consecutive years of dividend increases.
You can download the full list of all 65 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 30 years in a row, and in total has paid uninterrupted quarterly dividends to shareholders for nearly 90 years. The company’s dividend is also currently quite safe thanks to sound business fundamentals.
Fortunately, industry conditions have improved recently, which could pave the way for future growth for 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.
Today, it is an agricultural giant. Archer-Daniels-Midland operates in 160 countries and generates annual revenue above $64 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 had 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) 2020 earnings results on January 26, 2021. For the fourth quarter, adjusted earnings-per-share declined 15% year-over-year. Revenue increased 10% for the fourth quarter. For the full year, adjusted EPS increased 10.8% to $3.59.
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 that the first quarter will be another strong quarter, and the positive momentum will continue through 2021. They also expect strong growth in segment operating profit and another record year of EPS in 2021.
Despite the declining profitability, management remains optimistic about its outlook as it continues to progress on its strategic growth initiatives in nutrition for health, and sustainable materials.
For example, ADM’s Nutrition segment delivered 37% operating profit growth in the fourth quarter, its sixth consecutive quarter of over 20% profit growth year-over-year. The Nutrition businesses include flavors, specialty ingredients, and health & wellness.
Acquisitions are a major 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 further improve its portfolio. In total, the company has taken a number of actions to right the ship over the past several years. We expect 4% 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 $32 billion market capitalization, making it a large-cap stock. It is an industry giant, with ~450 crop procurement locations, 320 food and feed processing facilities, and 61 innovation centers.
At its innovation centers, the company conducts research and development on how to more effectively respond to changes in customer demand, and improving processing efficiency. Archer Daniels Midland has an unparalleled global transportation network, which 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 expected 2021 EPS of $3.83, ADM shares trade for a price-to-earnings ratio of 15.1. 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 fairly valued.
A declining valuation multiple could generate -0.1% 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 ~4% per year through 2026 and the stock has a current dividend yield of 2.6%.
In this case, total expected returns are 6.5% per year over the next five years, a solid risk-adjusted rate of return for Archer Daniels Midland stock.
Archer Daniels Midland encountered a difficult operating environment over the past few years. It is being negatively impacted by weak commodity prices, and the impact of the coronavirus pandemic.
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 a reasonable valuation and pays a solid 2.8% dividend yield, plus annual dividend increases. As a result, Archer Daniels Midland appears to be a strong holding for dividend growth investors.