Value Investing

Dividend Aristocrats Part 22 Of 52: Archer Daniels Midland Company (ADM)

Dividend Aristocrats Part 22 Of 52: Archer Daniels Midland Company (ADM) by Ben Reynolds

Archer Daniels Midland (ADM) is by far the largest farm products corporation in the world. The company currently has a market cap of over $24 billion – larger than the next 4 largest farm products companies combined.

The market caps of the next 4 largest farm products companies is shown below:

  • Bunge Limited (BG) has a market cap of $10 billion
  • Marine Harvest (MHG) has a market cap of $6 billion
  • Industrias Bachoco (IBA) has a market cap of $3 billion
  • Fresh Del Monte Produce (FDP) has a market cap of $2 billion

I last analyzed ARCHER DANIELS MIDLAND on December 1st, 2014. The company’s stock has declined 22.9% since that time.

Archer Daniels Midland Company (ADM)

Source: Google Finance

The company’s stock price decline over the last 11 months is a result of declining commodity prices and weaker-than-expected earnings.

Understanding ADM’s Operations

Archer Daniels Midland operates in 4 segments:

  • Agricultural Services
  • Corn Processing
  • Oilseeds Processing
  • WILD Flavors & Specialty Ingredients

Through the first 9 months of ADM’s fiscal 2015, the Oilseeds Processing segment has generated 49% of the company’s operating income. Agricultural Services and Corn Processing have generated 21% and 19%, respectively, of the company’s operating income. The WILD Flavors & Specialty Ingredients segment was responsible for 10% of operating income. A brief description of each segment is below:

Oilseeds Processing: The Oilseed Processing segment originates, crushes, processes, and merchandises oilseeds which include soybeans, cottonseed, sunflower seeds, canola, rapeseed, and flaxseed into vegetable oil and protein meal.

Corn Processing: The Corn Processing segment converts corn into sweeteners, starches, and bio products (ethanol).

Agricultural Services: Archer-Daniels-Midland’s Agricultural Services segment buys, stores, cleans, and transports agricultural commodities.

WILD Flavors & Specialty Ingredients: This segment was created on January 1st of 2015 to house the company’s flavorings and specialty ingredient operations which include specialty proteins, emulsifiers, and various vitamins, among other items. The WILD Flavors acquisition was completed in October of 2014.

ADM’s Competitive Advantage

Archer Daniels Midland has increased its dividend payments for 40 consecutive years and paid uninterrupted dividends for an amazing 83 years.

The company’s long history of growth speaks to its durable competitive advantage. Archer Daniels Midland processes and manufactures commodity food products. The company’s industry-leading size and long history give it an excellent distribution network. ADM’s distribution network consists of the following:

  • 300 processing plants (281 owned, 19 leased)
  • 466 procurement facilities (413 owned, 53 leased)
  • ~250 warehouses and terminals (all owned)
  • 39 innovation centers (all owned)
  • ~2,600 barges (2,100 owned, 500 leased)
  • 28,100 rail cars (13,500 owned, 14,600 leased)
  • 600 trucks (300 owned, 300 leased)
  • 1,300 trailers (all owned)
  • 41 ocean vessels (9 owned, 32 leased)

Source: 2014 Annual Report, page 15

ADM’s massive processing and distribution network gives it a strong competitive advantage that dissuades new firms from entering the market and protects the company’s profits.

Archer Daniels Midland Management Is Taking Advantage of Low Stock Prices

ADM’s management has not sat idly by while the company’s share price has declined over the last 11 months. The company has been aggressively repurchasing shares. Over the last year, the company has reduced its share count by 5.8%.

Share repurchases done when a stock’s price is depressed creates significant value for shareholders by reducing share count and thereby increasing the value of each share. The cheaper the share price, the more ‘bang for the buck’ share repurchases provide. Click here to learn more about share repurchases.

ADM’s management should be commended for repurchasing shares when the company’s stock price is depressed.

Archer Daniels Midland Is Not Done Growing

Archer Daniels Midland is expecting net profits of around $1.9 billion in fiscal 2015. The company had around the same level of profits in 2009. Archer Daniels Midland has seen little growth in its business over the last 6 years.

Despite this, Archer Daniels Midland does have positive future growth prospects. The company’s management is actively repositioning the business for higher margins. The WILD Flavors acquisition and creation of the new WILD Flavors & Specialty Ingredients segment is a push toward higher margin products.

The long-term growth driver for Archer Daniels Midland is increasing global food consumption. The global population is growing. More people means more mouths to feed and greater demand for commodity foods. Global population growth and increasing food demand is ADM’s long-term growth driver. The company’s distribution network gives it a strong competitive advantage that will allow it to continue growing as demand dictates.

ADM’s long-term growth numbers are very impressive. The company has compounded earnings-per-share at 13.6% a year and dividends-per-share at 12.5% a year from 1999 through 2015 (using expected 2015 earnings-per-share of $3.15).

I expect Archer Daniels Midland to continue growing earnings-per-share by at least the market average rate of ~7.0% a year over the long run. The company is likely to do significantly better than that as it improves margins through cost-cutting plans and focusing on higher margin businesses. Share repurchases will also help drive earnings growth on a per-share basis.

Archer Daniels Midland stock currently has a dividend yield of 2.8%. I expect total returns over a full economic cycle to be 10%+ for shareholders of ADM.

Safety, Recessions, & Final Thoughts

Archer Daniels Midland has around $1 billion in cash and short-term investments on its balance sheet. The company also carries around $7 billion in long-term debt and has a very safe interest coverage ratio of 7.8x. The company is conservatively financed.

Archer Daniels Midland also performs well during recessions. The company’s earnings-per-share through the Great Recession of 2007 to 2009 are shown below to illustrate this point:

  • 2007 earnings-per-share of $2.38
  • 2008 earnings-per-share of $2.84
  • 2009 earnings-per-share of $3.06

Grains still need to be processed and transported, even during recessions. As a result, the company is very recession resistant.

Archer Daniels Midland is currently trading for under 13x expected 2015 earnings. The company is trading near the top of its historical average dividend yield as well. Archer Daniels Midland appears to be undervalued at current prices, especially given its strong competitive advantage.

The company’s combination of value, safety, and above-average yield help Archer Daniels Midland to rank in the top 50% of stocks with 25+ years of dividend payments without a reduction using The 8 Rules of Dividend Investing.

 

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