The earth's population has risen from about 3 billion in 1960 to around 7 billion today. The population of the earth is projected to be over 9 billion by 2050. As the world's population increases, demand for food products will continue to grow.
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Archer Daniels Midland (NYSE:ADM) is one of the world's top agricultural processors. The company produces food ingredients, animal feeds, feed ingredients, and biofuels. ADM was founded in 1902 by George Archer & John Daniels. Today, the company boasts a worldwide transportation network and over 265 locations, along with 39 consecutive years of dividend growth.
ADM has a long history of growth, but is it a timely investment? This article will analyze ADM's current events, future growth potential, and expected shareholder return. Further, we will compare ADM to other businesses with 25+ years of dividend payments without a reduction.
ADM divides its business into 3 main divisions and several subdivisions. The company's Oilseed & Processing division is the largest, accounting for 48% of Q1 2014 operating profits.
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Source: ADM Q1 Presentation
The company posted 9.7% operating profit growth for the first quarter of 2014 compared to the first quarter of 2013. Growth was driven by increased ethanol demand and increased soy demand. ADM plans to improve operations by selling underperforming business segments.
The company recently announced it will sell its South American fertilizer business unit to The Mosaic Company (NYSE:MOS) for $350 million. The company has further plans to sell its underperforming chocolate business. A buyer has not yet been announced for the chocolate division.
On June 6th, 2014, ADM announced it will acquire the remaining 20% of Toepfer International. ADM owned 80% of Toepfer International prior to this announcement. The full acquisition will strengthen ADM's value chain and international position. Toepfer is a global merchandiser of agricultural commodities, with 37 offices globally. The acquisition further enhances ADM's position as a global commodities player and shows that management is focused on global growth.
Future Growth Prospects
Future growth for ADM will be driven by worldwide population growth. Global growth is not happening evenly. The majority of population growth over the next 15 years will occur in Asia and Africa. Europe is projected to have 0% population growth over the next 15 years.
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Source: ADM Investor Presentation, slide 7
As populations grow, demand for basic food items increases. ADM is well positioned to take advantage of this growth through its excellent logistics system and partnership with Asia's largest agribusiness company, Wilmar International (OTCPK:WLMIF). ADM owns 16% of Wilmar International, and has substantial supplier agreements with the business.
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Source: ADM Investor Presentation, slide 29
Shareholders of ADM can expect a return of 10% to 12% going forward from share repurchases (2%), organic growth (6% to 8%), and dividends (2%). ADM's management has historically been very shareholder friendly. The company regularly repurchases shares, and has increased its dividend for 39 consecutive years.
ADM appears to be fairly valued compared to its peers based on its forward P/E ratio.
Market Cap (millions)
The company's current P/E ratio of 21.89 is slightly higher than the overall stock market's P/E ratio of 19.37. The company may be somewhat overvalued historically, but is trading in line with overall current market levels.
Consecutive Years of Dividend Increases
ADM has increased its dividend payments for 39 consecutive years. Businesses with a long history of increasing dividends exhibit evidence of a sustainable competitive advantage.
Why it matters: The Dividend Aristocrats (stocks with 25-plus years of rising dividends) have outperformed the S&P 500 over the last 10 years by 2.88 percentage points per year.
Source: S&P 500 Dividend Aristocrats Factsheet, February 28, 2014, page 2
ADM has a dividend yield of 2.17%, which ranks it at 70 out of 118 businesses with 25+ years of dividend payments without a reduction. ADM will rank higher when its dividend yield increases as stock price falls.
Why it Matters: Stocks with higher dividend yields have historically outperformed stocks with lower dividend yields. The highest-yielding quintile of stocks outperformed the lowest-yielding quintile by 1.76 percentage points per year from 1928 to 2013.
Source: Dividends: A Review of Historical Returns
ADM's current payout ratio is 39.90%, ranking it at 59 out of 118 businesses with 25+ years of dividend payments without a reduction.
Why it Matters: High-yield, low-payout ratio stocks outperformed high-yield, high-payout ratio stocks by 8.2 percentage points per year from 1990 to 2006.
Source: High Yield, Low Payout by Barefoot, Patel, & Yao, page 3
Long-Term Growth Rate
The company has grown revenue per share by just under 10% over the last decade. This strong growth has been driven by solid organic growth and share repurchases. The company ranks at 8 out of 118 businesses with 25+ years of dividend payments without a reduction based on revenue per share growth.
Why it Matters: Growing dividend stocks have outperformed stocks with unchanging dividends by 2.4 percentage points per year from 1972 to 2013.
Source: Rising Dividends Fund, Oppenheimer, page 4
ADM has a fairly high long-term standard deviation of 34.76%, ranking the stock at 90 out of 118 businesses with 25+ years of dividend payments without a reduction. ADM's high standard deviation is due to the company's exposure to historically volatile commodities.
Why it Matters: The S&P Low Volatility index outperformed the S&P 500 by 2 percentage points per year for the 20-year period ending September 30th, 2011.
Source: Low & Slow Could Win the Race, page 3
ADM is one of the few businesses in the world that is virtually recession proof. Food product demand does not drop during recessions, as people cannot cut back on eating basic foods.
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Source: ADM Investor Presentation, slide 6
ADM ranks in the top 50% based on the 8 Rules of Dividend Investing. The company will rank higher when its dividend yield increases due to a reduction in its P/E ratio. ADM's future growth potential is promising, as the company's long-term growth is dependent upon rising populations. At its current valuation, ADM is a hold.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.