Old McDonald Had Two Farms, Actually (ADM)

Quick Background:

In my last look at The Andersons, I mentioned I wanted to look at a close competitor, the Archer Daniels Midland Company (ADM). Let’s do that today, shall we?

The Archer Daniels Midland Company (ADM) is an international agribusiness focused on commodities trading and cereal-grains and oilseeds processing. Founded in 1902 in Minneapolis, the company is currently headquartered in Decatur, Illinois, USA. The company has three business segments: Oilseeds Processing (which processes crops like soybeans, flaxseed, and canola), Corn Processing, and Agricultural Services (which operates railcars, grain elevators, and such, as well as trades commodities).

ADM’s competition includes The Andersons (ANDE – analyzed yesterday here), Bunge Ltd (BG) and Ingredion (INGR – looked at 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 $41,962.60 today, all dividends reinvested. This yields an annual rate of return of 10.6%, which doubles the S&P 500 during this time frame. (Source: FAST Graphs)

Sparknotes Analysis:

If you’ve forgotten, here’s a link to my screening criteria,

• Pays a dividend: Yes
• Has 5+ years of dividend increases: Yes (40 years)
• Has not frozen dividend for over 8 quarters: Yes
• Has a Chowder number of 12 or more: Yes (13.7)
• Has am EPS payout ratio of less than 70%: Yes (32.65%)
• Pays a dividend monthly or quarterly: Yes (Quarterly; March, June, September, December)

• Has an S&P Quality Ranking of ‘A-‘ or better: No (B+)
• Has generally increasing earnings over the past 10+ years: Yes
• Is fairly valued/undervalued according to the Normal P/E ratio (blue line): Yes
• Is fairly valued/undervalued according to the Intrinsic P/E ratio (orange line): Yes

Other Ratings:

• S&P Capital IQ: 3-star hold
  • Scale is 1-5, 1 being ‘strong sell’, 5 being ‘strong buy’
• Thompson Reuters StockReport: 7 (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: 2 for safety; 1 for timeliness
  • Scale is 1-5, 1 being best, 5 being worst
• Morningstar:
  • Moat: None
  • Stewardship: Standard

Financial Overview:

The company’s dividend yield is currently 2.33%, a fair if not spectacular number. The company pays out $0.28 quarterly, $1.12 annually. ADM’s dividend history is a bit interesting. Pre-2001, the company paid the dividend as stock. Every year, the company would execute a 105:100 stock split, thereby creating a 5% stock dividend. In 2001, the company moved to a quarterly cash dividend, and has increased it ever since. Increases have generally been in the range of 11-13%, but the most recent increase was a whopping 26.3%. Another reassuring fact is that the company has paid an uninterrupted dividend (in one form or another) for 83 years.

As would be expected for a Dividend Champion like ADM, the dividend is solid. The company has a debt/equity ratio of 0.3, less than the peer group’s average of 0.8. The interest coverage ratio is 10.29, which although nowhere near the best number I’ve seen, still tells me that debt obligations are not overwhelming. The company has $1.1 billion in cash and cash equivalents on the balance sheet. With an annual expenditure of $624 million in dividends, a combination of cash, debt issuance, and expansion of the payout ratio could sustain the dividend for a significant period.

The company has been relatively neutral in its share count recently: 643.05 million in 2010, and 634.29 million today. There was a significant spike in 2011 to about ~675.8 million shares. This interesting phrase popped up in the 2011 annual report to explain it: “Diluted weighted average shares outstanding for 2011 include 44 million shares assumed issued on January 1, 2011 as required using the ‘if-converted’ method of calculating diluted earnings per share for the quarter ended March 31, 2011.” As best as I can figure, this means that ADM was trying to account for convertible securities, that if exercised, would yield ~44 million common shares. I don’t view this as a problem, as the share count is now back to 2010 levels.

The company has not split since moving to a cash dividend in 2001.

ADM’s current P/E ratio is 14.0. The projected one-year forward P/E ratio is 13.7, which implies a pretty much static share price and slight earnings growth for the coming year. Just like we saw with ANDE, ADM has a lot of competitors, but very few direct ones. Ergo, we’ll compare the company’s margins selectively.

• Gross: 8.75% ANDE, 5.87% ADM, 4.59% BG
• Operating: 1.72% ANDE, 3.39% ADM, 1.63% BG
• Net Profit: 2.70% ANDE, 2.77% ADM, 0.85% BG

We then see here that ANDE and ADM are roughly equal, and that BG lags considerably.

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. ADM is therefore projected to grow earnings 7.1%, and has a total annual rate of return of 9.23% by 2020. Compare this to ANDE’s AROR of 25.38% and BG’s of 20.55%, we see that ADM will underperform the peer group.

Risk Factors:

• Legal issues: ADM, unfortunately, has been accused of less-than-ethical behavior over the years. One of the most famous cases, the 1993 lysine price-fixing investigation, resulted in over half a billion in damages. In December 2013, the company also had to pay a large penalty for paying bribes to foreign officials. While I’m definitely not the most “ethical” of investors, I am concerned by both the scope and recency of legal issues.
• Agricultural subsidies: Observe this lovely quote:

• The Archer Daniels Midland Corporation (ADM) has been the most prominent recipient of corporate welfare in recent U.S. history. ADM and its chairman Dwayne Andreas have lavishly fertilized both political parties with millions of dollars in handouts and in return have reaped billion-dollar windfalls from taxpayers and consumers. Thanks to federal protection of the domestic sugar industry, ethanol subsidies, subsidized grain exports, and various other programs, ADM has cost the American economy billions of dollars since 1980 and has indirectly cost Americans tens of billions of dollars in higher prices and higher taxes over that same period. At least 43 percent of ADM’s annual profits are from products heavily subsidized or protected by the American government. Moreover, every $1 of profits earned by ADM’s corn sweetener operation costs consumers $10, and every $1 of profits earned by its ethanol operation costs taxpayers $30.

If this flow stops, who knows what could happen to ADM’s profitability?

• Commodity cycles: This is a given with most agribusinesses. Just like ANDE, ADM 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:

Well, ADM meets all criteria besides the quality ranking. I am not really thrilled by the dividend coverage, though I feel it isn’t in danger of being cut. And the yield is nearly a full percent higher than ANDE’s, the other agribusiness I am considering. Margins are roughly in-line with ANDE. What I don’t like about ADM are the legal issues. ADM is not a clean company, and hasn’t been for a while. While I am not an “ethical” investor, as I mentioned above, it’s shocking what trouble ADM gets into. And it’s concerning – all it takes is one major judgment and the cash balance, debt levels, or dividend could be impacted. And when compared to ANDE’s dividend growth rate, historical returns, and family ownership, I don’t feel that ADM offers enough for me to replace ANDE with it on my watchlist. I’m passing.

Does ADM make the cut for your portfolio? Also, how can I improve future analyses?

Disclosure: None

All data is accurate as of market close, 4/16/2015. 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.

Tags: ADM, Archer Daniels Midland Co, dividend-stock-analysis