Quick Background:
The Andersons (ANDE) is an agricultural conglomerate headquartered in Maumee, Ohio, USA. Founded in 1947 by Harold and Margaret Anderson, the company has grown from one grain terminal to a $1.2 billion enterprise, spanning most of the Midwestern US.
ANDE operates in six segments: Grain, Ethanol, Plant Nutrients, Rail, Turf & Specialty, and Retail. The Grain segment offers grain storage, crop insurance, feed sourcing, and various crop management and forecasting tools. The Ethanol segment, oddly enough, produces ethanol and corn oil. The Plant Nutrient segment produces liquid and solid fertilizers and pesticides, but also has a sideline in deicers for sidewalks, roads, and runways. Rail works with maintenance and management of railcars, while the Turf & Specialty segment offers turf, chemical development and processing, and corncob byproducts. The Retail segment operates various home decor, grocery, and outdoor equipment stores.
The company is not alone in agribusiness; competitors include Archer-Daniels-Midland (ADM) and Ingredion (INGR – conveniently analyzed here).
For more basic information, check out the company’s website and the 2014 annual report.
Fun fact: An investment of $10,000 in December 2000 would be worth $148,500.22 today, all dividends reinvested. This yields an annual rate of return of 20.8%, which quintuples the S&P 500’s return of 4.3% during this time frame. (Source: FAST Graphs)
Sparknotes Analysis:
Same company, same screening criteria, let’s do it:
- Pays a dividend: Yes
- Has 5+ years of dividend increases: Yes (13 years)
- Has not frozen dividend for over 8 quarters: Yes
- Has a Chowder number of 12 or more: Yes (15.0)
- Has am EPS payout ratio of less than 70%: Yes (14.58%)
- Pays a dividend monthly or quarterly: Yes (Quarterly; January, April, July, October)
- Has an S&P Quality Ranking of ‘A-‘ or better: Yes (A-)
- Has generally increasing earnings over the past 10+ years: Yes
- Is fairly valued/undervalued according to the Normal P/E ratio (blue line): No
- Is fairly valued/undervalued according to the Intrinsic P/E ratio (orange line): Yes
Other Ratings:
- Thompson Reuters StockReport: 6 (optimized score of 3)
- Scale is 1-10, 10 being best, 1 being worst
- Optimized scores weight insider trading and price momentum heavier than other criteria
- Value Line: 3 for safety; 3 for timeliness
- Scale is 1-5, 1 being best, 5 being worst
Financial Overview:
The dividend yield is on the high end of mediocre, currently sitting at 1.40%. The cash payout is $0.14 quarterly, $0.56 annually. This dividend, although low, has been increasing nicely since inception. The most recent increase was a fantastic 27%. The average dividend growth rate over the last three, five, and 10 years has hovered between 13-16%. Although this number seems more impressive than it is, due to having a tiny payout, it is still a positive. Equally appealingly, the company has never cut its dividend. Although there were some initial hiccups after initiation in 1996, including a freeze lasting 8 quarters in 2000-2002, the company has continued to grow the dividend constantly. The debt/equity ratio is reasonable at 36.2% ($298.6 million in debt / $824.0 million in equity), and is well below the peer group’s average of 1.0. Combine this with the minuscule payout ratio, cash and cash equivalents of $114.7 million, and interest coverage ratio of 9.47, and we see the dividend is solid.
Unfortunately, although the dividend is appealing, share buybacks aren’t. The company is a serial issuer of shares, going from 26.7 million in 2010 to 28.8 million today. However, this is not without reason. The company makes quite a few smaller acquisitions; the most recent being Auburn Bean & Grain in Michigan, and prefers to pay in stock. Also, this trend may reverse with the December announcement of a $50 million share buyback program. ANDE has also split twice recently. First, the company split little over a year ago, a 3:2 split in February 2014. The company also had a 2:1 split in 2006.
The company’s current P/E ratio is 10.4, and the one-year forward P/E ratio is 11.0. This implies that earnings will take a hit in the coming year, possibly as the agricultural cycle bottoms out. Since many of ANDE’s competitors are such in only one or two areas, I want to compare its margins against its one true direct competitor, ADM.
- Gross: 8.75% ANDE, 5.87% ADM
- Operating: 1.72% ANDE, 3.39% ADM
- Net Profit: 2.70% ANDE, 2.77% ADM
Overall, ANDE performs well against ADM, especially considering ADM is 25 times the size (in market cap) of ANDE. Of course there are going to be operational synergies in larger companies. Therefore, I don’t see any true negatives in ANDE.
Naturally, predicting the future returns of a given stock is difficult. But we can make an educated guess based on several logical deductions. Let’s assume that the historical compound annual growth rate holds steady, and that the share price reverts to the historical mean P/E ratio. If we project these assumptions onto ANDE, we see that by 2020, we have a total annualized rate of return of 25.38%, which is phenomenal. Earnings are expected to compound at a rate of 16.4%. This discrepancy implies that ANDE’s current share price is below what earnings would justify, which is a positive sign. ADM has an AROR of about 9.27%, and INGR has an AROR of 21.46%. ANDE is therefore projected to be the best-performing stock of the peer group.
Risk Factors:
- Family control: ANDE is still controlled by the Anderson family, One member of the family, Mike Anderson, is currently CEO. Daniel Anderson, another family member, heads the Retail group. While this hasn’t been an issue in terms of limiting shareholder returns, it could be a concern in the future, should drastic, painful changes need to be made. In general, though, I usually view this as a positive, as the controlling family usually has a strong desire to maintain dividends. We’ve see this in the Forman family in Brown-Forman (BF/A) and the Johnson family in Franklin Resources (BEN). As a result, I think this actually serves as another indicator that the dividend is very safe.
- Commodity cycles: This is a given with most agribusinesses. ANDE relies on the pricing of corn, grain, phosphates, nitrogen, and natural gas to determine profitability. Although the company tries to hedge as much as possible, only so much can be done.
Final Conclusion:
ANDE meets all of my criteria, save one valuation criterion. Although I feel the dividend yield is lower than I would prefer, the safety and dividend growth rate make me happy. I don’t like the share issuance, but I see why it happens, and understand it is necessary to grow the business via good acquisitions. The margins are nothing spectacular, but they hold up well against its much larger competitor. The founding family still clearly has a stake in the company, and I feel they will protect the company – and the dividend – appropriately. All in all, I view the company as solid, if not spectacular. The only question is, is it a buy now? I say yes, and am personally adding it to my watchlist. But I feel the price will get even lower as time goes on. The cycle hasn’t bottomed out yet, and I feel that will provide some attractive entry points in the future. Buy now, sure, but keep an eye on the stock, as there will be chances to lower your cost basis in time.
Does ANDE make the cut for your portfolio? Also, how can I improve future analyses?
Disclosure: None
All data is accurate as of market close, 04/14/2015. My stock analysis archive page has been updated accordingly. Please read my disclaimer here before choosing to invest. Company logo image source is available here. Data source is FAST Graphs, David Fish’s US Dividend Champions List, or company materials, unless otherwise indicated.
4 Comments
Hey DD,
I had never heard of this company before, but after reading your analysis I can see the merit in adding it to a dividend portfolio, even if only for its impressive dividend growth rate.
One thing I was wondering: do you not include a yield threshold as part of your screening criteria? I ask because a lot of dividend investors have a minimum they look for, usually around 2.5%-ish or so, bar for a few exceptions like DIS or AAPL. I see that you do include a specific minimum Chowder number as part of your screening criteria, so I assume that for low-yielding stocks, as long as there is a strong enough dividend growth rate to make up for it you are willing to consider it. Am I right in this assumption?
That aside I think your analyses are solid and to the point. Keep up the good work brother!
Cheers
Zero to Zeros recently posted…My Ideal Dividend Stock Portfolio
A specific yield requirement? Not really. I personally have things I would like to see in terms of yield; my portfolio won’t ever be full of <1% yielders kind of thing. But I won't disregard an investment as a result of having a low yield. For example, my current wishlist includes EXPD, V, MA, GILD, and BDX, all of which have yields <2%, but who have great DGRs. So basically, yes, your assumption is correct!
Yeah I feel the same way. While I obviously wouldn’t litter my portfolio with low yielders, I do think the Chowder number is generally a better metric to use as a screening criterion than the yield.
I think a lot of investors underestimate the compounding effect a high dgr can provide. I myself sometimes make the mistake of getting carried away searching for high yields. The concept of dgr is just more abstract and less immediately tangible than the concept of yield, which can trick our human minds at times haha.
For sure. There’s just something to be said for getting the cash upfront right now, as opposed to waiting and hoping the yield increases some day. As long as you balance those two kinds of stocks, your portfolio should generally be healthy.