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I bought Archer Daniels Midland (NYSE:ADM) yesterday afternoon. I think ADM is a great company with tremendous potential for future growth. ADM has come to be viewed by the market as an ethanol and biodiesel stock, and they are in fact the world’s largest ethanol producer, but biofuels are just a sideline to their main business of crushing soybeans and corn to manufacture food products.

ADM is a strong company with a solid leadership position in the highly profitable business of processing soybeans, corn, wheat, and cocoa. It is hard to find commercially prepared food or beverages which do not contain ingredients manufactured by ADM.

Although the stock’s current dividend yield is only 1.14%, this company has paid dividends for 75 years, they have increased the dividend every year for more than 25 years, and the payout ratio is only 17%. The stock is quite cheap for a blue chip with excellent prospects. It has a price-earnings ratio of 15, a price to cash flow ratio of 10, and a price to book value ratio of 2. The company’s net income has tripled over the last five years.

At the height of the alternate energy mania last spring, Archer Daniels Midland stock sold as high as 46.36 on hope that they would be able to make money selling ethanol and biodiesel some day. But the stock has collapsed as oil prices have fallen and corn prices have soared, reducing the likelihood that anyone will be able to profit from ethanol produced from corn.

However, last week the company announced that it has indeed started to make money selling ethanol. Yesterday afternoon I was able to buy ADM at a 25% discount to last May’s price. There is a good chance that this will go against me in the short term. But taking a longer view, I believe this investment will produce an average annual total return in excess of 10% from ADM’s food processing business alone. And in the event that the U.S. government subsidizes the production of biofuels, a reasonably good possibility, ADM’s profits and stock price should soar.

ADM 1-yr. chart:

ADM Investment

Related Articles: Environmental Investing: Stock Picks For Going Green; Ethanol is Here to Stay; Alternative Energy Boom Has Its Limits; An Inconvenient Truth: Changing Our State of Energy; Ethanol and the Future of Alternative Fuels

Source: Archer Daniels Midland: A Great Company - Makes Ethanol Too