Dividend Aristocrats In Focus Part 44: Archer Daniels Midland Sure Dividend

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Dividend Aristocrats In Focus Part 44: Archer Daniels Midland


Updated on January 7th, 2020 by Samuel Smith

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 57 companies in the S&P 500 Index, with at least 25 consecutive years of dividend increases.

You can see a full downloadable spreadsheet of all 57 Dividend Aristocrats, along with several important financial metrics such as price-to-earnings ratios, by clicking on the link below:

 

Each year, we review all 57 Dividend Aristocrats. Next up in the 2020 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 actually below where it was exactly five years ago. The share price has stagnated due to deteriorating industry fundamentals. In particular, the decline in agriculture commodity prices eroded Archer Daniels’ earnings for several years, while the lingering trade war represents an additional headwind.

However – despite the sector headwinds – the company has remained steadily profitable and has raised its dividend annually, including a 4.5% increase in February 2019.

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 thanks to sound business fundamentals.

Fortunately, industry conditions have improved recently, which could pave the way for a recovery in the future.

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 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.

ADM Overview

Source: Investor Presentation

It operates four business segments: Origination, Oilseeds, Carbohydrate Solutions, and Nutrition. The Oilseeds segment is Archer Daniels Midland’s largest, at 44% of annual profits, followed by Carbohydrate Solutions at 28%. The Origination and Nutrition segments comprise 16% and 10% of operating profit, respectively. The remaining 2% 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.

Furthermore, industry conditions have finally improved, which is setting the stage for a return to growth.

Growth Prospects

In late October (10/31/19) the company reported third quarter results. Revenues for the third quarter came in at $16.7 billion, up 5.9% year-over-year. Despite the revenue growth, operating profit was down 14.0% and earnings-per-share declined by 16.4% year-over-year. The Nutrition segment saw the highest year-over-year revenue increase with 58.0% growth thanks to growing demand for plant-based protein.

Despite the declining profitability, management remains optimistic about its outlook as it continues to progress on its strategic growth initiatives in flexitarian diets, nutrition for health, and sustainable materials.

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 2020. On January 17th, 2019 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 2019, 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. Every year since the shares outstanding peaked at 659 million in 2013, management has repurchased millions of shares, leaving the count today at well under 560 million shares outstanding.

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 $26 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:

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

Archer Daniels Midland appears to be undervalued today. 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 2019 book value of $35 per share, the stock has a current price-to-book ratio of 1.3. 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 0.9% 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 ~6% per year through 2024 and the stock has a current dividend yield of 3.0%.

In this case, total expected returns are 7.5%-8% per year over the next five years, a solid risk-adjusted rate of return for Archer Daniels Midland investors.

Final Thoughts

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 trades at a slight discount to its historical price-to-book ratio and pays a solid 3.0% dividend plus annual dividend increases. As a result, Archer Daniels Midland appears to be a slightly undervalued dividend growth stock. We rate the stock a buy.

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