Dividend Farming Scorecard: Archer-Daniels-Midland (ADM)

Archer-Daniels-Midland

As a Dividend Farmer who grew up working on a farm in Western Nebraska I have a soft spot for agriculture.  Archer-Daniels-Midland is a major play in the agricultural sector and I own a small position.  I’ve been looking through Dividend Champions for good additions to my Dividend Farm and ADM is a Champion in an underweight sector in my portfolio.  I thought I’d review it to see if it should remain on the farm or added to.

The table provides a snapshot of factors I’m scoring for ADM as of May 15, 2019.  Laying out my analysis helps me benchmark a holding or opportunity against target metrics.  It also allows me to quickly compare this firm to alternatives as part of my screening process.

FACTOR	METRICS	ADM
CCC List	Champion	Champion
Current Yield	4.0%	3.32%
Company Profile	Red Flags?	China Trade War
Industry Leadership	Top 10	#2 in World
Market Cap	$10 B+	$22.9 B
P/E	< 20	14.1
P/B	< 2	1.2
Debt / Equity	< 1	1.45
Dividend History (Years)	25	44
12 Month Price Range	Lower Half	Bottom Quartile
Dividend Payout Ratio	< 75%	46.7%
Portfolio Weight	Slightly Over	Under

CCC List: The DRIPinvesting.org web site provides the list of Champions, Contenders, and Challengers where I normally start.   (ADM) is a Dividend Champion with 44 straight years of dividend growth.  Not many firms can top that streak

Current Yield:  ADM’s yield is 3.32% which is nearly 25% below my desired target.  With a long history of increases it could be worse, particularly if there’s room for increases in the payout ratio.  Although not ideal, the yield alone is not a show-stopper.

Company Profile:  ADM is a stalwart in the world of agriculture known primarily for its role in the food commodity sector.  The firm trades, transports, stores, processes, and merchandises a broad range of crops produced in the U.S. and abroad.  The current trade war with China is depressing agricultural prices, but that’s not a structural issue with the company nor is it like to continue indefinitely.

Industry Leadership:  ADM is the #2 agribusiness in the world by revenue behind only family-owned Cargill, per Tharawat Magazine.

Market Capitalization:  At $22.9 B ADM’s market cap is more than double my minimum.  Coupled with its global position, the market cap and dividend history offer good stability.

Price to Earnings:  The trailing P/E of 14.1 is well within my range indicating investors aren’t overpaying for ADM’s future income stream.

Price to Book:  The P/B ratio of 1.2 is solid at a point 40% below my target.  Paying a buck-twenty for a dollar’s worth of ownership isn’t as nice as paying pennies for a dollar, but it’s still within safe range.

Debt to Equity:  Debt to equity is 45% over target.  Not ideal.   

Dividend History:  Growing dividends for 44 years is stellar.  If a Champion is crowned after 25 years, going 44 carries a lot of weight for a value investor like this Dividend Farmer.

Price Range:  The price range is in the bottom quartile of its trailing 12-month (TTM) range.  Given the pullback from its high and no major red flags, this appears to be a buy opportunity.

Payout Ratio:  The payout ratio of 46.7% is well under my 75% target ceiling.  ADM has a lot of room to grow its dividend which bodes well for long-term yield on cost and annual pay raises for those of us looking at future dividend streams. This helps make up for the under target yield noted earlier.

Portfolio Distribution:  ADM is a smallish holding in my basket.  I could add considerably to it without fear of my portfolio becoming unbalanced.

Analysis  

Of the companies reviewed the past several months (ADM) scores remarkably well against my benchmarks and better than other firms thus far.  Although the yield is lower than I’d like, ADM’s stability and room for div growth are attractive.  The trade war with China affecting U.S. agricultural commodities is a bother, but likely temporary.  The world will continue eating in which case demand for ADM’s products and services won’t go away.  Unless I find a better Champion soon, taking a 3%+ yield on the dip is better than a zero interest rate and no-growth opportunity on cash in my bank account.

The thoughts expressed here are those of the author, who is not a financial professional.  Opinions should not be considered investment advice.  They are presented for discussion and entertainment purposes only.  For specific investment advice or assistance, please contact a registered investment advisor, licensed broker, or other financial professional.