Friday, June 21, 2013

Archer Daniels Midland Stock Analysis

Archer-Daniels-Midland Company (ADM) manufactures and sells protein meal, vegetable oil, corn sweeteners, flour, biodiesel, ethanol, and other value-added food and feed ingredients. This dividend champion has paid dividends since 1927, and has increased them for 37 years in a row.

The company’s last dividend increase was in February 2013 when the Board of Directors approved an 8.60% increase in the quarterly distribution to 19 cents /share. The company’s peer group includes Bunge (BG), Ingredion (INGR) and Cargill.

Over the past decade this dividend growth stock has delivered an annualized total return of 10.20% to its shareholders.

The company has managed to deliver an 11.30% average increase in annual EPS since 2003. Analysts expect Archer-Daniels-Midland to earn $2.55 per share in 2013 and $2.95 per share in 2014. In comparison, the company earned $1.84/share in 2012. Over the next five years, analysts expect EPS to rise by 10%/annum.

The return on equity for Archer-Daniels-Midland has been following the rise and fall in commodities prices over the past decade. I expect this indicator to increase over the next five years, as earnings per share rebound. Currently, the cost of capital is 5.30%, which bodes well for the earnings growth potential behind new projects and capex spending. I generally want to see at least a stable return on equity over time. I use this indicator to assess whether management is able to put extra capital to work at sufficient returns.

The annual dividend payment has increased by 12.30% per year over the past decade, which is slightly higher than the growth in EPS.

A 12% growth in distributions translates into the dividend payment doubling almost every six years on average. If we look at historical data, going as far back as 1990, one would notice that the company has managed to double distributions every six years on average.

The dividend payout ratio has charted a complete u-turn over the past decade. However, it has never gone significantly beyond 35%. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently Archer-Daniels-Midland is attractively valued at 17.50 times earnings, yields 2.30% and has a sustainable distribution. I would consider adding to my position in the stock on dips below $30.

Full Disclosure: Long ADM

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Dividend Champions Index – Five Year Total Return Performance
Warren Buffett’s Dividend Stock Strategy
Five Dividend Champions Actively Boosting Distributions to Shareholders
Dividend Aristocrats List

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