In my view, Archer Daniels Midland's (NYSE:ADM) stock should be included in every diversified, large-cap dividend stock portfolio, and now is the right time to buy the stock. While waiting for a significant rebound in the price of agriculture commodities, investors can enjoy the generous dividend, yielding 3.68% a year. Despite continued low agriculture commodity prices, ADM raised its dividend by 7% on February 02. The company has increased its annual dividend payment to shareholders for 32 consecutive years. Even during the global economic crisis of the years 2008-2009, ADM continued to grow its dividend.
On February 02, ADM reported its fourth-quarter 2015 financial results, which missed EPS expectations by $0.03 (4.7%). The company reported revenue of $16.45 billion, down from $20.89 billion in the year earlier period and below consensus of $19.4 billion. ADM missed expectations in its last three quarters after beating estimates in its four previous quarters, as shown in the table below:
Data: Yahoo Finance
In my opinion, it is quite impressing that despite the challenging conditions, ADM achieved an adjusted return on invested capital of 7.3% in 2015, 70 basis points above its annual cost of capital, generating a positive economic value added (EVA). According to the company, global dynamics reduced margins across the U.S. agricultural export sector, the U.S. ethanol industry, and in the soybean crushing industry worldwide. Adverse market conditions that impacted many of its businesses earlier in the year continued through the fourth quarter. In the fourth quarter, ADM advanced its strategic plan by expanding its international corn processing footprint with the acquisition of Eaststarch, progressing its destination marketing strategy with the announcement of the Medsofts Egyptian joint venture, and strengthening its European Olenex refined oils joint venture.
In addition, on February 02, ADM announced that it has reached an agreement to purchase a controlling stake in Harvest Innovations, an industry leader in minimally processed, expeller-pressed soy proteins, oils and gluten-free ingredients. According to the company, the combination will create the industry's broadest, most vertically integrated soy protein company, and the only fully integrated supply chain, from origination to final ingredients, for gluten-free solutions.
In the announcement, Vince Macciocchi, president of ADM's WILD Flavors and Specialty Ingredients business unit, explained:
More and more consumers are looking for foods that are gluten-free, that aren't genetically modified, and that are healthy and organic, and ADM is perfectly positioned to meet those needs. We were already the provider of choice for a wide range of healthy, clean-label ingredients, and in the last year, we've significantly expanded our product portfolio. Today's addition perfectly complements our existing ingredient businesses and offers customers a full-service, one-stop shop for their ingredient needs.
As I see it, the company's advance in its strategic plan that has led to a substantial improvement in returns is very encouraging. ADM continued to sell businesses with little growth prospects and acquired high-growth companies like WILD Flavors, Specialty Commodities, and Harvest Innovations, and in the last quarter, it completed the sale of its global cocoa business. I believe the creation of the new Flavors and Specialty Ingredients segment will improve ADM's sales growth and margin profile. Assuming that the current headwinds likely to persist, the company is taking steps to reduce costs. According to ADM, it will continue to implement its pipeline of operational excellence initiatives, with an objective of an incremental $275 million of run-rate savings by the end of the calendar year. As part of the evolution of its strategic plan, the company is also taking a fresh look at the capital intensity of its operations and portfolio, seeking innovative ways to lighten up and redeploy capital in its efforts to drive long-term returns.
Archer Daniels Midland is the world's largest corn processor, and it produces about 11% of U.S. ethanol. To estimate the current quarter operating results for the Corn Processing segment, I have calculated the average price of corn and ethanol for the current and the latest quarters. The average corn price decreased about 4.3% thus far in the current quarter compared to the previous one, and the average price of ethanol dropped about 6.9%. Since corn price declined less than ethanol price, ethanol production margin might decline in the current quarter. However, the company's cost reduction programs could compensate the negative price changes.
Corn, March 2016 Leading Contract Daily Chart
Ethanol, March 2016 Leading Contract Daily Chart
Charts: TradeStation Group, Inc.
Since the beginning of the year, ADM's stock is down 11% while the S&P 500 Index has decreased 6.2% and the NASDAQ Composite Index has lost 10%. Moreover, since the beginning of 2012, the stock has gained only 14.2%. In this period, the S&P 500 Index has increased 52.5% and the NASDAQ Composite Index has gained 72.9%. Nevertheless, considering its compelling valuation, the recent drop in its price creates an excellent opportunity to buy the stock at an attractive price.
ADM Daily Chart
ADM Weekly Chart
Charts: TradeStation Group, Inc.
Regarding its valuation metrics, ADM's stock is pretty cheap. The trailing P/E is very low at 10.97, and the forward P/E is also very low at 11.03. The price-to-sales ratio is extremely low at 0.30, and the Enterprise Value/EBITDA ratio is low at 8.54.
Moreover, ADM's efficiency parameters have been much better than its industry median, its sector median and the S&P 500 median, as shown in the table below:
During 2015, the company returned $2.7 billion to shareholders through dividends and the repurchase of 43 million shares.
ADM raised its dividend by 7% on February 02. The annual dividend yield is at 3.68%, and the payout ratio is only 37.3%. The annual rate of dividend growth over the past three years was very high at 15.7%, and over the past five years, was at 12.2%. The current yield is at a historical high, as shown in the charts below, which indicates that the stock is undervalued.
ADM Dividend data by YCharts
According to Portfolio123's "ValueRank" ranking system, ADM's stock is ranked first among all 54 Russell 1000 Consumer Staples companies.
The "ValueRank" ranking system is quite complex, and it is taking into account many factors like; five-year average yield, sales growth, trailing P/E, price to book, price to sales and return on equity, as shown in Portfolio123's chart below:
Back-testing over 16 years has proved that this ranking system is very useful. The reader can find the back-testing results of this ranking system in this article.
In my view, Archer Daniels Midland's stock should be included in every diversified, large-cap dividend stock portfolio. While waiting for a significant rebound in the price of agriculture commodities, investors can enjoy the generous dividend, yielding 3.68% a year. Despite continued low agriculture commodity prices, ADM raised its dividend by 7% on February 02. The company has increased its annual dividend payment to shareholders for 32 consecutive years. Even during the global economic crisis of the years 2008-2009, ADM continued to grow its dividend. It is quite impressing that despite the challenging conditions, the company achieved an adjusted return on invested capital of 7.3% in 2015, 70 basis points above its annual cost of capital, generating positive EVA. Regarding its valuation metrics, ADM's stock is pretty cheap. The trailing P/E is very low at 10.97, and the forward P/E is also very low at 11.03. Furthermore, according to Portfolio123's "ValueRank" ranking system, ADM's stock is ranked first among all 54 Russell 1000 Consumer Staples companies. Considering its compelling valuation and the fact that ADM returns substantial value to its shareholders by stock buyback and increasing dividend payments, the recent drop in its price creates an excellent opportunity to buy the stock at an attractive price.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.