Updated on February 5th, 2019 by Josh Arnold
The Dividend Aristocrats are a group of 57 companies in the S&P 500 Index, with at least 25 consecutive years of dividend increases.
Each year, we review all 57 Dividend Aristocrats. Next up in the 2019 edition is Archer Daniels Midland (ADM).
Archer Daniels Midland has had some tough times in the past several years. Indeed, its share price today is right where it was in early 2015.
The share price has stagnated due to deteriorating industry fundamentals. Namely, the decline in agriculture commodity prices eroded Archer Daniels’ earnings for several years.
However, the company has remained steadily profitable. This has allowed it to continue raising its dividend, including a 4.5% increase on February 5th.
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 87 years. The company’s dividend is also currently quite safe relative to its fundamentals. We explore Archer-Daniels-Midland’s current dividend safety in the following video:
Fortunately, industry conditions have improved this year, which could pave the way for a recovery in 2019 and beyond.
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, at 45% of annual profits, followed by Carbohydrate Solutions at 29%. The Origination and Nutrition segments comprise 17% and 10% of operating profit, respectively. The remaining 9% of operating profit is derived from a non-core ‘other’ segment.
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.
For example, company earnings fell 18% in 2015. Conditions did not improve much in 2016. Archer Daniels Midland’s total sales fell 7.9% in 2016, along with a 27% decline in diluted earnings-per-share.
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.
And, industry conditions have finally improved, which set the stage for a return to growth.
Conditions substantially improved for Archer Daniels Midland in 2018. In early February (2/5/18) the company reported fourth-quarter and full-year financial results. For the fourth quarter, adjusted earnings-per-share increased 7.3% from the same quarter a year ago.
Performance was mixed among Archer Daniels Midland’s various operating segments. Operating profit more than doubled in Oilseeds, due to particularly strong demand for soybean meal. However, the Origination, Carbohydrate Solutions, and Nutrition segments posted declines in the fourth quarter.
Still, Archer Daniels Midland performed well in 2018. Adjusted earnings-per-share increased 44%, to $3.50.
Going forward, the company can still invest in growth initiatives to turn itself around. One of the ways is through portfolio optimization through acquisitions and divestitures.
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.
Since 2014, Archer Daniels Midland invested more than $5 billion in new growth projects. This investment included building six new plants, five innovation centers and labs, 17 acquisitions, and four joint ventures.
Recent acquisitions are expected to boost growth in 2019. On January 17th the company announced it will acquire the remaining 50% stake in its Gleadell Agriculture Ltd. joint venture, including Dunns Ltd.
Archer Daniels Midland will combine its existing U.K. origination operations with the newly acquired businesses to create ADM Agriculture Ltd. This acquisition will increase Archer Daniels Midland’s origination, storage, and destination market capabilities in the U.K.
Archer Daniels Midland is also expanding its animal nutrition business. In February, the company officially closed on its $1.8 billion acquisition of global animal nutrition leader Neovia.
Earnings will also be boosted by the company’s share buybacks. This is a benefit of remaining consistently profitable during industry downturns—the company can use some of its excess cash flow to repurchase shares at lower prices.
Archer Daniels Midland reduced its diluted share count by 4.8% in 2016. It returned $1.7 billion to shareholders in dividends and share buybacks during the year.
Competitive Advantages & Recession Performance
Archer Daniels Midland has built significant competitive advantages over the year. 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 $21.9 billion market capitalization. It is an industry giant, with 450 crop procurement locations, 270 food and feed ingredient manufacturing facilities, and 46 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.
Valuation & Expected Returns
Archer Daniels Midland appears to be undervalued today. A breakdown of Archer Daniels Midland’s historical price-to-earnings, price-to-book, and dividend yield can be seen in the table below:
In this case, we also recommend investors utilize the price-to-book ratio for valuation purposes. Archer Daniels Midland’s profits are volatile and fluctuate with the price of grains and commodities like oil. When oil prices are low, ethanol demand declines, which hurts Archer Daniel Midland’s profits.
The company’s book value is far more stable and gives a better idea of the company’s ‘real’ value relative to its history.
Archer Daniel Midland’s 10 year average price-to-book ratio is 1.36. Based on 2018 book value of $35 per share, the stock has a current price-to-book ratio of 1.19. As a result, the stock appears to be a bit undervalued at current prices on the basis of book value, our preferred valuation metric for this particular stock.
An expanding valuation multiple could generate 2.7% 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%-5% per year through 2024. And, the stock has a current dividend yield of 3.4%.
In this case, total expected returns are 10%-11% per year over the next five years. This is a strong expected rate of return for Archer Daniels Midland investors.
Archer Daniels Midland has encountered a difficult operating environment. It is being negatively impacted by declining prices of agricultural commodities and oil, which has weighed on its earnings in recent years.
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 could be undervalued, and pays a solid 3.4% dividend plus annual dividend increases. As a result, Archer Daniels Midland appears to be an attractively valued dividend growth stock.