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Introduction

Many people believe there is money to be made in commodities but are not sure how to profit from them without being forced to own them. There are a few companies that because of their sheer scale are able to maneuver and position themselves to profit from commodities regardless of how volatile the market may be. These companies have proven time and time again that, regardless of what the actual price of particular commodities do, they are able to generate growing levels of profit. Two specific companies that make their money from commodities just reported good earnings for the latest quarter. I would like to cover some of the highlights of these two companies. Hopefully you can see there is money to be made from commodities without having to be exposed to their sometimes violent price swings.

Archer Daniels Midland (NYSE:ADM)

Historical Returns

YearRevenueProfitEarnings Per ShareOutstanding Shares
2008$69.28 B$1.80 B$2.79646 M
2009$69.21 B$1.71 B$2.65644 M
2010$61.68 B$1.93 B$3.00644 M
2011

$80.68 B

$2.04 B$3.13654 M
2012$88.92 B$1.22 B$1.84666 M

Note: B = Billion : M = Million

As you can see from the above table revenue and profit for ADM does fluctuate. This is to be expected; since this company's profit margins are tied directly to commodities we cannot expect it to be immune to swings in commodity prices. Even though the company shares a relationship with commodity prices they do a good job of absorbing the more violent swings. Now, let us take a look at how well ADM has turned these fluctuating prices of commodities into a steady income stream for investors over time.

Key Dividend Data

Annual Dividend:$0.76
Dividend Payout Ratio:41%
Dividend Yield:2.51%
Dividend Growth 5yr Avg:8.78 %
Consecutive Div. Increases:38 years

As you can see ADM has shown an ability to continuously profit from commodities even while price swings seem to affect their business. ADM's ability to absorb erratic and sometimes violent price swings is provided by its hedging endeavors. While hedging may hurt ADM's profit occasionally, it does allow them to have a more reliable stream of revenue that can be counted on to return value to its investors. This long term view of solid earnings from commodities is what allows ADM to profit when prices go up as well as down.

Earnings Report Highlights

  • The company reported net earnings for the quarter of $510 million, or $0.77 per share, up from $0.12 per share in the same period one year earlier. Adjusted earnings per share were $0.60, up from $0.51 in the same period last year.
  • Oilseeds Processing profit increased $202 million, with year-over-year improvements in crushing and origination results in all regions.
  • Excluding last year's $339 million asset impairment charge, Corn Processing profit decreased $207 million.
  • Agricultural Services profit rose $77 million, as solid U.S. soybean exports, improved international merchandising and a gain on ADM's investment in GrainCorp benefited results.
  • Net debt balances declined to $7.2 billion, the lowest level since June 2010, as the benefits of the company wide focus on unlocking cash began to be realized.

Earnings Report Key Comments

"The ADM team managed well despite challenges from the U.S. drought and from persistent, negative margins in the ethanol industry," said ADM Chairman and CEO Patricia Woertz. "Our results in Oilseeds and Agricultural Services demonstrated the ability of our people to use our global asset network to prepare for and manage in a range of market conditions.

In North America, we fully utilized our oilseeds crushing capacity to meet strong global demand, and we adjusted our transportation and origination network to move goods efficiently despite constrained river traffic and a smaller corn crop. In South America, we leveraged our origination, transportation and export facilities to move the record corn crop to world markets. And, in Europe, we made some operational changes, and the market responded to reduced imports.

During our abbreviated fiscal year, we drove meaningful improvements in capital, costs and cash to enhance our future competitiveness. We continued taking action to improve underperforming businesses. As part of our ongoing portfolio management, we sold $570 million of non-core investments. And, through a company-wide focus, we unlocked more than $1 billion in working cash."

ADM's complete earnings report can be found here.

ADM Summary

ADM has exposure to many agricultural products. This means that ADM has many more commodities to be concerned about than certain other companies. It also means that their profit is not tied to any one specific commodity. To be more specific ADM's exposure to the commodity market consists of oilseeds, wheat, corn and cocoa. Last year ADM's profit on their ethanol production suffered from the damage done by the drought to the corn crop as well as a miscalculation in the hedging operation. While their ethanol profit was down their profit in the oilseed crushing section rose as well as their agricultural services sector. ADM's size as a company gives it the ability to offset losses in certain commodities with gains in other sectors. The demand for agricultural products is only going to increase with the world's population growing at the rate that it is. It is estimated that the world's population will grow at a 1.2% rate for the next 5 years. ADM is positioned to profit from this increased demand created from population growth. ADM's exposure to these commodities is not to be viewed as a weakness, rather ADM's exposure should be considered a boon for the stock. Growing demand for its products and an ability to continue to grow profits even in the face of clearly difficult situations sets ADM up well for future growth.

Chevron (NYSE:CVX)

Historical Returns

YearRevenueProfitEarnings Per ShareOutstanding Shares
2008$255.11 B$23.93 B$11.672.05 B
2009$159.29 B$10.48 B$5.242.00 B
2010$189.61 B$19.02 B$9.482.01 B
2011$236.54 B$26.90 B$13.442.00 B
2012$230.59 B$26.18 B$13.321.96 B

Note: B = Billion : M = Million

CVX, just like ADM, shows fluctuations in profit and revenue. This again is tied to the fact that CVX makes its money selling a product that is subject to wild swings in prices. No commodity has been more violent in its price fluctuations over the last 5 years than oil. CVX has done a good job of absorbing those price swings while continuing to return value to its investors. Now, let us take a look at how well CVX has turned those fluctuating prices into a steady income stream for investors.

Key Data

Annual Dividend:$3.60
Dividend Payout Ratio:27%
Dividend Yield:3.1%
Dividend Growth 5yr Avg:9.25 %
Consecutive Div. Increases:19 years

As you can see CVX, although not immune to commodity price swings, has done a very nice job of rounding out the peaks and troughs of commodity price swings. It continues to absorb price swings while still returning value to its investors. CVX, like ADM, seeks to return value to its investors through many actions, including but not limited to, share buybacks and dividend payments. As you can see CVX's dividend payout ratio is fairly low. This allows CVX to continue to increase return to investors even if the market for its products remains flat.

Earnings Report Highlights

  • Earnings of $7.2 billion ($3.70 per share - diluted) for the fourth quarter 2012, compared with $5.1 billion ($2.58 per share - diluted) in the 2011 fourth quarter.
  • Full-year 2012 earnings were $26.2 billion ($13.32 per share - diluted), down 3 percent from $26.9 billion ($13.44 per share - diluted) in 2011.
  • Sales and other operating revenues in the fourth quarter 2012 were $56 billion, down from $58 billion in the year-ago period, mainly due to lower crude oil volumes.
  • The company purchased $1.25 billion of its common stock in fourth quarter 2012 under its share repurchase program. Repurchases for the full year totaled $5 billion.

Earnings Report Key Comments

"Chevron delivered another very strong year in 2012," said Chairman and CEO John Watson. "Our upstream portfolio continues to produce excellent results. We've now led the industry in earnings per barrel for over three years. Our downstream businesses also delivered highly competitive earnings per barrel.

Strong cash flows allowed us to invest aggressively in our major capital projects and to acquire several important, new resource opportunities. We also raised the dividend on our common shares for the 25th consecutive year and continued our share repurchase program, both of which demonstrate our commitment to providing near-term, top-tier returns to our shareholders."

Watson continued, "We made significant progress on our Gorgon and Wheatstone LNG projects in Australia in the past year. At the same time, we announced six additional natural gas discoveries offshore Australia, and completed an asset exchange that increased our interests in Carnarvon Basin fields. These results support future expansion opportunities for these two projects."

"We also expanded our global exploration resource acreage in 2012," Watson noted, "including entries into five new countries, the addition of significant new acreage in the United States, and the recently announced acquisition of a 50 percent operated interest in a western Canada LNG project."

CVX's complete earnings report can be found here.

CVX Summary

Chevron, along with XOM, is one of the last completely integrated oil service companies. This integration allows CVX to profit at all stages of the oil extraction, refining and distribution process. However, CVX's revenue and profit does fluctuate, and while revenue was down year over year profit held pretty steady. This means that a rebound in prices positions CVX to profit well from those increases. While CVX continues to profit from its existing oil extraction and refining structure, it also continues to position itself to profit from the natural gas boom as well. The only fuel source that has threatened to make inroads in oil globally is the quickly growing natural gas market. CVX made 6 natural gas discoveries in 2012 alone. CVX's net natural gas production increased 8 percent to 3.96 billion cubic feet per day in 2012. While oil will continue to be an integral part of the global economy, another fuel is needed to meet the world's energy demands. If natural gas does take market share from oil CVX has positioned itself to profit from either commodity. The question concerning CVX is not oil or gas but to profit or not to profit. Choose CVX and you will see they are positioned to profit from this ever changing fossil fuel market.

Summary

ADM and CVX are two companies that offer profits from commodity markets while protecting you from exposure to those commodities. With the ever evolving global economy it is important to position yourself to profit from those changes. Increasing demand for agriculture and energy commodities bodes well for these two companies. ADM and CVX offer you the potential to profit from these markets that we all know are important but are not always the most attractive to invest in.

Source: 2 Dividend Stocks Profiting From Commodities