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 with over 265 locations. The company has a been able to consistently grow profitably. The company has increased its dividend payments 39 consecutive years.
2nd Quarter 2014 Earnings
Archer Daniels Midland reported positive 2nd quarter results this morning. The company's earnings per share increased from $0.46 in the 2nd quarter of 2013 to $0.77 this quarter.
Archer Daniels Midland's strong earnings are being driven by rising ethanol demand and oilseed products. In addition to increased demand from factors beyond Archer Daniels Midland's control, the company has also increased its ROIC by 2 percentage points since the same period last year. Improving margins in light of increased demand is an excellent way to close out the first half of fiscal 2014 for Archer Daniels Midland.
Archer Daniels Midland breaks its operations down into 3 primary divisions:
- Oilseed Processing - 37% of 2nd quarter 2014 operating profits
- Corn Processing - 39% of 2nd quarter 2014 operating profits
- Agricultural Services - 23% of 2nd quarter 2014 operating profits
Operating profits in the company's Oilseed Processing division increased 1.87%. Archer Daniels Midland's oilseed processing operations are divided into several sub categories: crushing and origination; refining, packaging and biodiesel; Cocoa; and Asia.
Cocoa category profits increased from a loss of $17 million to a profit of $20 million this quarter. The company's cocoa division is only partially hedged. Rising cocoa costs have caused the large profitability expansion in this category for Archer Daniels Midland.
The company's refining, packaging and biodiesel segment operating profit was up nearly 28% on the quarter. The division is quickly expanding as demand for soy and other vegetable protein is growing quickly.
On the downside, the company's Asian operations performed poorly. Archer Daniels Midland owns 16% of Wilmar International and has substantial supplier agreements with the company. Wilmar International operates primarily in Asia and makes up Archer Daniels Midland's Asia investments. To say that Wilmar International has struggled in recent years is an understatement. The company saw EBITDA decrease 41% (!) from the first quarter of 2013 to the first quarter of 2014. The declines are from negative crush margins and substantially lower palm refining margins in China. Crushing capacity utilization in China is only about 50%, making the competitive landscape extremely difficult.
Archer Daniels Midland realized operating profits of $277 million in its corn processing division, up from $208 million in the same quarter a year ago. The company grew sweetener and starch processing volume and profits, but the real growth story in the company's corn processing division is ethanol.
Archer Daniels Midland's Bioproducts sub-division (which produces ethanol) increased operating profits from $97 million in the second quarter of 2013 to $141 million in the second quarter this year. The substantial growth comes from steadily rising ethanol demand in the US. The trend toward increased ethanol use in the US is likely to continue. Senator Al Franken has recently stated that the administration plans to raise the requirements on the amount of ethanol blended into fuel supplies.
Agricultural services operating profits increased from $81 million in the 2nd quarter of 2013 to $203 million this quarter. The strong growth was due to rising US export volumes. The US is the world's leading exporter of corn. Value added corn products such as ethanol make up the bulk of US corn exports. Archer Daniels Midland has done an excellent job marketing corn products internationally, which helped boost agricultural services operating profits this quarter.
Shareholders of Archer Daniels Midland can expect a return of 10% to 12% going forward from share repurchases (2%), organic growth (6% to 8%), and dividends (2%). Archer Daniels Midland's management has historically been very shareholder friendly. The company regularly repurchases shares, and has increased its dividend for 39 consecutive years.
Comparison to Other Stocks With A Long History of Dividend Increases
Archer Daniels Midland is a leader in the farm products industry. Archer Daniels Midland will be compared to other businesses with a long history of dividend increases using the 5 Buy Rules from the 8 Rules of Dividend Investing below. The comparison will show if Archer Daniels Midland compares favorably to other investment options investors currently have.
Consecutive Years of Dividend Increases
Archer Daniels Midland has increased its dividend payments for 39 consecutive years. Companies that are able to increase their dividend year after year show evidence of a sustainable competitive advantage that allows them to grow profitably year after year.
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.
Archer Daniels Midland's dividend yield of 2.04% is the 87th highest out of 132 businesses with 25+ years of dividend payments without a reduction. The company's dividend yield is slightly below average compared to other businesses with a long history of dividend increases
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.
Archer Daniels Midland has a payout ratio of 39.90%, which is the 43rd lowest out of 132 businesses with 25+ years of dividend payments without a reduction. The company's payout ratio gives it significant room to increase dividends faster than overall company growth
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.
Long-Term Growth Rate
Archer Daniels Midland has grown revenues at 9.79% per year for the last decade. The company's fast growth over the last decade has been brought on by the rising corn demand from ethanol and rising soybean demand. The company has the 9th highest growth rate out of 132 businesses with 25+ years of dividend payments without a reduction.
Why it Matters: Growing dividend stocks have outperformed stocks with unchanging dividends by 2.4 percentage points per year from 1972 to 2013.
Archer Daniels Midland's 10 year price standard deviation is 34.75%. The company has the 98th lowest standard deviation out of the 132 businesses with 25+ years of dividend payments without a reduction. The company's high volatility results from its sensitivity to commodity prices.
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
Performance Through Great Recession
Archer Daniels Midland business operations performed will over the Great Recession of 2007 to 2009. The company managed to grow earnings each year despite declines in the global economy. The company processes commodity grains which generally do not see volume declines during economic hardships as they are staple products that are not easily replaced.
Archer Daniels Midland is the 44th highest ranked stock based on the 8 Rules of Dividend Investing. The company offers shareholders an average dividend yield and strong growth. Archer Daniels Midland's high volatility makes it a suitable investment for investors who are able to tolerate significant price declines. The underlying business of Archer Daniels Midland is sound and will likely continue to reward shareholders with business growth and consistent dividend increases.
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 (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.