ADM: Feeding The World And Dividend Portfolios

Civilizations exist because of agriculture. You could argue it has never been as important as it is today. As the global population keeps growing fast, food shortage has become one of our biggest concerns. Archer Daniels Midland Co (NYSE: ADM), one of the world’s largest agribusiness conglomerates, has built its business around feeding the world.

Investing in a company that operates in this essential industry seems like a no-brainer. After all, food is not something you can simply give up. You can do without alcohol, cigarettes, sweets, silk underwear, and tech gadgets. Food, however, you can’t live without. Still, investing is never as simple as that. ADM is a long-lived corporation, with an extensive global reach. It’s also a company that has proved its commitment to shareholder returns. Nevertheless, its strong business track record doesn’t automatically make it the best investment in the sector.

Our task today is to take a close look at ADM and determine whether it makes a good choice for income investors. In terms of valuation, the company hasn’t been so attractively priced for a very long time. But there are also risks to consider. For some investors, these risks may outweigh ADM’s impressive record of dividend payments.

ADM in brief

ADM
ADM

It all began with a linseed crushing business that George Archer and John Daniels started in 1902. They named it Archer Daniels Linseed Co. Archer Daniels Midland Co was born in 1923 with the acquisition of Midland Linseed Products Co. The following year the company listed on the NYSE.

Nowadays, ADM is a major agricultural processor and food ingredients provider. It employs more than 32,000 people and serves customers in more than 160 countries.

The company is headquartered in Chicago, Illinois. It currently has a market cap of about $22.8 billion.

Business overview

ADM has divided its operations into five segments.

The biggest profit contributor is the oilseeds processing segment. In the first quarter of 2017, this unit accounted for 46% of operating profits. It deals in soybeans and soft seeds processing, delivering vegetable oils and protein meals.

The corn processing segment turns corn into sweeteners, starches, and bioproducts. The division was responsible for 26% of first-quarter operating profits.

The agricultural services unit buys, stores, and transports agricultural commodities. It accounted for 12% of operating profits in that same quarter.

Wild flavors & specialty ingredients (WFSI) got a massive boost after ADM paid $3 billion to acquire Wild Flavors in 2014. The unit supplies flavors, colors, sweeteners, and a vast range of ingredients for multiple industries. It contributed 11% to first-quarter operating profits.

ADM also has a financial services operation. It provides futures clearing and brokerage services, both domestically and internationally. In the first quarter, this segment accounted for 4% of operating profits.

Dividends

ADM has a really impressive dividend track record. The company has been paying dividends for 85 years. Moreover, it has been raising its annual distribution for 41 years without interruption.

Over the past two decades, ADM’s dividend has grown at a compound annual rate of 11%. In the past three years, the growth rate has been 16.4%.

Shareholders in the company are currently collecting $0.32 per share. The dividend yield at present is 3.16%. This significantly exceeds the industry median (1.9%), as well as the company’s historic median (2%), GuruFocus data show.

Valuation

Let’s go back to those risks we mentioned in the beginning. Agricultural commodities are the heart and soul of ADM’s business. This means the company is vulnerable to crop prices, which are highly volatile. The recent plunge in commodity prices has sparked concerns over the short-term performance of ADM.

In addition, the company has been dealing with expenses incurred through acquisitions and disposals. They represent part of a turnaround program that should position ADM for steady long-term growth. Right now, however, they are weighing heavily on profitability. This is one of the reasons ADM’s shares are seriously trailing the S&P 500 index.

As a truly global operator, the company is also vulnerable to currency fluctuations. We also need to mention that ADM’s business is affected by government agricultural policies, particularly corn subsidies and ethanol regulations.

For investors willing to take a bit of risk in their stride, ADM is quite attractive right now. At the time of writing, this Dividend Aristocrat is trading at $40.57. This is mere cents above the 52-week low ($40.40). Besides, ADM has a forward P/E ratio of 15.3. This compares to an industry median of 19.2 and an S&P 500 average of 19.9.

 

Disclosure:

I do not have a financial interest in any of the companies featured in this article, nor do I plan on having one within the next three days.

This article reflects my opinions. The company is not paying me to write it and I do not have any business relationship with any companies mentioned in it.

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