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!
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