Archer-Daniels Midland (ADM) Stock Anaylsis

It has been a while since we performed our last stock analysis, when we reviewed Philip Morris International.  This seemed to be beneficial for us, as Lanny purchased a large amount of shares last week; Recently I have been keeping a close eye over a stock that is down almost 9% YTD and would represent a new industry in my portfolio. While it appears to be undervalued, it is time to perform a detailed stock analysis over Archer-Daniels Midland to see how it stacks up in our dividend stock screener!

ADMlogo2

About Archer-Daniels Midland

Who is ADM?  From the company’s profile on Morningstar, ADM “is a processor of oilseeds, corn, wheat, cocoa, and other feed and is a manufacturer of vegetable oil and protein meal, corn sweeteners, flour, biodiesel, ethanol, and other value-added food and feed ingredients.”   So ADM plays a major part in converting raw materials into products that are used every day by consumers and other businesses.   While their products are not sexy, as the main brands do not carry the brand recognition as some of my other stocks such as Kraft and PG, ADM has found a niche as a market leader in the farming, bio-fuel, and industrial industries.  Chances are if you work in these industries, you are very familiar with an ADM product.

ADM had a great earnings release for dividend nvestors on February 3rd.  First, ADM announced an increase in its quarterly dividend from $.24/share to $.28/share, or a 16.67% increase!  But should a large dividend increase really be a big surprise to the company’s shareholders?  Not at all, as the company’s three and five year average dividend increases are 17.58% and 13.52%, respectively.  Very strong dividend growth for a company with a low dividend yield that is slightly greater than the average S&P 500 yield.  Second, in this earnings release, it was announced that the company should buy back between $1.5b and $2b shares during 2015.  Assuming the minimum amount of $1.5b, the company could potentially repurchase about 31.6m shares, which would reduce the current shares outstanding by 5%.  This is why we love share buyback programs, as a 5% decrease in shares outstanding could potentially increase their earnings per share between $.20-$.30 annually (The range is dependent on when the purchases are made, as EPS is calculated based on a period’s average shares outstanding during the time frame).  As EPS increases, the  company’s payout ratio decreases, and therefore, there is further room to grow the dividend going forward.  As I mentioned before, this was a great earnings release for dividend growth investors as they were rewarded two different ways.

 Dividend Diplomats Stock Screener

What’s not to like so far about ADM?  The company is a leader in an industry that is heavily integrated in multiple aspects of our economy and management has taken great strides to its shareholders.  However, we have a stock screener for a reason, as we look to identify potentially under-valued dividend growth stocks.  Let’s run ADM through our stock screener.

– P/E Ratio Less than S&P.  Check.  ADM’s current P/E ratio is 13.74 based on trailing earnings and 12.94 based on forward earnings per www.finviz.com.  Both figures are below the S&P 500.

-Payout Ratio less than 60%.  Check.  ADM’s current payout is less than half of the figure we use in our screener, indicating that there is plenty of room to continue to grow their dividend going forward.

-Increasing Dividends.  Check.  After all, you cannot earn the honor of becoming a Dividend Aristocrat without increasing your dividend for an extended period of time.  As we discussed earlier, ADM increased their dividend in February once again (as we expected) to continue their dividend streak.

-Five Year Average Dividend Yield.  Now that ADM has passed the first three metrics of our stock screener, we wanted to assess a few additional metrics to provide additional information for our decision.  As discussed in detail here, we like to compare a stocks five-year average dividend yield to the current yield.  If the current yield is greater than the average yield, it could be a sign of future appreciation as the law of averages will eventually kick in and the dividend yield will revert to the mean.  Of course, the other way the current yield could decrease would be due to a decrease in the current dividend.  However, since management recently announced a large dividend increase, a share buyback program, and the company has a low payout ratio, I highly doubt this scenario is likely.   Currently, ADM yields 2.38%, which is greater than the five-year average yield of 2.18%.  Another positive mark for ADM.

Dividend Growth Rate Exceeds Current Portfolio Average–  When I reviewed my portfolio at the end of the year, I took a hard look at my portfolio’s weighted average growth rate.  Ever since Lanny wrote an article on the importance of your portfolio’s dividend growth rate, I love looking at this metric, especially considering how our mission is to build a reliable, growing dividend stream.  What better way to assess the growth aspect of the previous sentence than to review the rate in which your dividend income increases?  During my assessment, I committed to only adding stocks that have either (or both) a dividend yield greater than my portfolio’s current average yield or a dividend growth rate that exceeds my portfolio’s current figure.  While ADM’s yield is lower than my portfolio’s average (~3.8%), it easily exceeds my portfolio’s growth rate (which was 7.54% at the time of assessment).  Once again, another positive mark for ADM.

 Summary

Wow!  I am very impressed with the results.  ADM passed ever metric of our stock screener and even a couple of additional metrics that Lanny and I like to review.   With a strong performance and the fact the company is trading at a discount to the current market, I am finding it very hard to justify not adding shares to my portfolio in the near future.  While I am not committing to a purchase yet (mostly because I do not have a lot of extra cash at the moment), ADM is sitting at the very top of my watch list.

What are your thoughts about ADM?  Have you initiated a position recently or are you planning to do so?  If not ADM, are there alternative companies in the industry you are considering?   Are there any other items you would like us to assess in future stock analyses?

Thank you all for stopping by.  I am looking forward to reading your comments!

Bert

DISCLOSURE: I DO NOT RECOMMEND ANY DECISION TO THE READER or ANY USER, PLEASE CONSULT YOUR OWN RESEARCH. THIS IS ACTUAL DATA, ANALYSIS, HOWEVER I BASE NO INVESTOR RECOMMENDATION.  THANK YOU FOR YOUR UNDERSTANDING.
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23 thoughts on “Archer-Daniels Midland (ADM) Stock Anaylsis

  1. ADM is a gem that I am surprised more DGIs dont own. I have owned the stock for the past couple of years and have been very happy with its performance. The company is a dividend champion for a reason and even with a track record like that – they grow their dividends in double digits! They are also increasing their payout ratio, while still being in a very agreeable range. This stock is a screaming buy imo.

    R2R

    • R2R,

      Thanks for stopping by! Are you planning on purchasing additional shares and adding to your current position soon? Seems like it could be a great time to add. I am surprised like you are that there are not more investors flocking to the company. IT seems as if their dividend news and buyback program flew under the radar, which I am sure has something to do with the crazy oil market/environment and market that was taking place at the beginning of February. There were two keep words you said…DIVIDEND CHAMPION. If there is anything that the Kraft acquisition showed me today, it is to invest in strong companies and good things are bound to happen in the long term.

      Thanks again for stopping by. I’m glad to hear from you!

      Bert

  2. Diplomats,
    They’ve been on my watch list for a while. Nice to see a full review of them done. Thanks for that. They look nice, perhaps they will be a buy sometime later this year.
    – Dividend Gremlin

    • Gremlin!

      Thanks for stopping by and the kind words. I’m glad I could help provide some information for you; I love doing these analyses and had a great time putting this one together. Just out of curiosity, do you have other stocks higher on your watch list? They are a great company, strong dividend growth, great buybacks with a great valuation, which is why they were catapulted to the top of my list. But I am biased on this one haha

      Bert

      • I would not say I have other stocks higher, I just keep a large list. I use Sharebuilder for my main investments and keep things categorized by industry/sector. So I have about 10 lists, and I move between them depending on what I’m looking for. Right now I have most of my portfolio in Consumer Staples, so I am looking for a little more diversification. Still, that sector will likely be my bread and butter long term. Just no way around how useful it is.

        • That’s my favorite sector Gremlin. What better for long term success than investing in companies that are a a staple in every household? If worse comes worse, they possess some pretty valuable brands which will provide management some additional flexibility to provide value. Which stocks from this sector are on your watch list, I am always looking to add shares in the strong companies in this sector?

          Bert

  3. I’ve checked on ADM before, but we the recent drop it surely makes it more attractive. It does have the type of growth rate I’m usually searching for. Thank you for the work! 😉

    • DivGuy,

      How’s it going?? Thanks for stopping by! No problem at all, I had a great time putting the analysis together. With the more attractive valuation, are you planning to buy, watch, or pass? Just curious, that’s all.

      Bert

      • I’m not going to buy now as I have no liquidity at all 🙁 I just made a bold move selling ScotiaBank (TSE: BNS) to buy SNC Lavallin (TSE: SNC). It’s an engineer firm that was hurt by fraud allegations…

        • That is a very bold move indeed Dividend Guy! BNS has been very popular among the dividend investing community and I have read many buy articles. I am interested to heard your thoughts on this one. How significant are the fraud allegations? Is the investigation still on going? I’m going to keep an eye out for your article about this so I can read more about your new company.

          Bert

  4. I like ADM as evidenced by my recent purchase into the company. Like you, it was more diversification to my portfolio since I did not have any exposure to a company like it. Also, the dividend increases have been pretty awesome.

    I read so much from bloggers/investors that they either hate buybacks or they hate dividends. I particularly like buybacks because they reduce the shares and more dividends can be paid. When you combine buybacks with dividends, you’ve got yourself a real winner which is why I really like investing in those type of stocks.

    You might have noticed but, look at AAPL stock some time. When it was at the split adjusted price of $100, the market cap was $700 billion. I remember this because there were hundreds of articles on the company saying $1 Trillion is just another year away… Well, with the buybacks they started doing the past couple years, a $700 billion market cap would put them at a stock price of $120. In the past couple of years, you would have picked up a 20% gain all because they reduced the shares. Not to mention, the dividends have been increasing pretty substantially but at a smaller rate than the buybacks. They are paying less in dividends then they were when they first started! The combination of the two is where the money is made!

    Nice write up, look forward to you being a fellow shareholder!

    • ADD,
      Thanks for the kind words. I am looking forward to being a fellow shareholder soon. My funds cannot transfer to Sharebuilder fast enough haha The one con I can think of for buybacks, at lest from a dividend investors perspective, is that the cash used for the buyback provides a one-time benefit rather than the long term impact of using the cash to increase the dividend. But I am sure that is a major part of the point haha However, as you pointed out, the buybacks have the positive impact as shares are reduced, earnings are increased, and payout ratios are reduced. Thus, more room to grow the dividend going forward. Even if management doesn’t increase the dividend, it at least provides a larger safety net.

      Very interesting information on Apple. I may finally have to start considering the stock, especially if the dividend growth and buyback programs continue. I have historically hated investing in tech stocks, and finally investing in IBM took Lanny both pulling my teeth and annoying the heck out of me until I finally decided to invest. I like what you pointed out at the end, the combination of buybacks and dividends is where investors score big. You shouldn’t hate or be opposed to any method that management is using to improve shareholder value and if used correctly, leveraging both products can really catapult a company.

      Thanks for stopping by! I enjoyed the conversation and the information about Apple.

      Bert

  5. ADM has been on my dividend watchlist for a while, I don’t think you can wrong with this one. I have my eye on NSC too.

    • Sam,

      Thanks for dropping by. I don’t think you can go wrong either, and I’m trying hard not to over-think this one. This seems like a great time to pick up shares in a great company at a discount. I have my eye NSC as well and Lanny and I were actually talking about it last night. The company is also our our watch list, but I would like to see the price continue to fall. For now, I’ll use my excess funds for ADM.

      Are you planning on buying ADM, or are there other stocks you will be buying before ADM?

      Bert

      • Hey

        I purchased ADM, PX, and DD yesterday. All three had a nice price drop recently which I see as an opportunity.

        Concerning, NSC I researched further and came to the conclusion not to purchase it. Their operation relies heavily on coal transportation, however coal use has been decreasing over the years in the U.S.

  6. DD,

    Can’t go wrong with ADM. Even larger companies need ADM to process raw materials for use in their manufacturing. I’m still holding out for $34.5-35 for the 2.5% dividend yield. I know a different between 2.4 and 2.5 isn’t that big of a deal but we all must abide to our standards.

    • Broke Dividend Investor,

      You established your standards for a reason, right? You must stick to your own investing rules to avoid reckless purchases. It is your portfolio, not ours, so what’s important is you make the purchase when your investing strategy dictates. Hopefully ADM continues to slide so we can become fellow shareholders!

      Thanks for stopping by.

      Bert

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