Bunge Limited: The Dividend By The Numbers

About: Bunge Limited (BG)
by: Individual Trader

The company just reported its Q1 numbers.

We go through how the dividend has been trending.

Investors should be ready for more volatility.

Bunge Limited (BG), the agribusiness and food company, currently trades with an earnings multiple of just under 26. Although this valuation is higher than the industry average of just under 17, Bunge's sales and book multiples of 0.2 and 1.4 look undervalued compared to the averages in this industry.

Shares have been in a sustained decline since the start of 2018. Furthermore we do not see any clear divergences on the daily chart which could suggest that the selling may be coming to an end.

In saying this, many investors remain invested in this name primarily because of the generous dividend. Furthermore, a position in Bunge arguably offers more diversification in a portfolio due to the stock's exposure to the commodity markets. Presently, Bunge pays out a 3.82% dividend yield. The annual payout has been on the rise now for 17 years. Therefore with the firm having announced its first quarter numbers recently plus also having confirmed the $0.50 quarterly payout, let's take a fresh look at the dividend to see the downward trend in the share price has been affecting the key dividend metrics.

Despite having a much higher dividend yield that its competitors in this industry, dividend growth also plays a crucial factor for long-term investors. Income based investments should handily beat the inflation rate in order to ensure purchasing power is not being lost over time. Furthermore, strong dividend growth rates usually means sustained growth in the firm's bottom line.

Over the past 10 years, Bunge has grown its dividend on average by 10%-plus per year. This looks attractive on the surface, but earnings growth has not kept pace. In fact, over the past four quarters, the company has earned $2.11 per share which actually means its earnings have slightly dropped over the past decade. Remember Bunge's forward annual dividend payout is $2 per share at present.

This explains the high payout ratio this stock has at present. Dividend payout ratios are calculated by dividing the dividend payout into the firm's net income. Since net income hasn't grown, the dividend on the surface doesn't look to be sustainable here.

However if we move up higher on the income statement, we can see that operating profit over the past four quarters has come in at $935 million. Interest expense of $344 million and tax of $198 million make us arrive at the net profit total of $344 million over the past four quarters.

There's no getting away from the fact that Bunge is currently paying a large amount of its operating profit toward the interest on the company's debt. Almost 37% to be exact. Straight off the bat, one would feel that if this trend continues, it will stifle dividend growth going forward.

If we look at the balance sheet, we can see how the firm's assets and liabilities have been trending. In the first quarter of this fiscal year, Bunge reported just over $6.3 billion of equity on its balance sheet. This number is well down the $8.4 billion number the firm reported in 2014. Although the reported debt to equity ratio may look favorable at present (as it stands under 1), this number is only calculated off interest-bearing debt. Bunge has reported $13.25 billion of debt on its balance sheet. The trend unfortunately is upward and asset growth simply isn't there at present to match the growth in the company's debts.

The one outlier than can remedy the adverse trends above is forward earnings growth. Although a bumper year is predicted in 2020 ($3.86 per share), we note that trends here also have been declining with over $5 a share being expected just a short three months ago. Investors should remember that the biggest proponent of share price growth is earnings growth. Bunge needs to steady the ship, especially if commodity markets do not cooperate. With the S&P in general looking like it's ready to drop into an intermediate decline, Bunge shares may see more downside.

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.