Updated April 2nd, 2021 by Bob Ciura
At Sure Dividend, we strongly believe that the best stocks that can be bought and held to generate long-term wealth have a number of characteristics in common. First, they are strong companies that run their respective industries and can generate consistent profits year after year – even during recessions.
In addition, they have shareholder-friendly management teams dedicated to increasing their dividends each year. Because of this, we advocate investing in the Dividend Aristocrats, a group of 65 companies in the S&P 500 Index, with at least 25 consecutive years of dividend increases.
You can download the full list of all 65 Dividend Aristocrats, as well as some key financial metrics like price / earnings ratios and dividend yields, by clicking the link below:
Every year we review all Dividend Aristocrats. Next up is Archer Daniels Midland (ADM).
Archer Daniels Midland has increased its dividend every year for over 30 consecutive years, paying quarterly dividends to shareholders without interruption for nearly 90 years in total. The company’s dividend is also reasonably safe right now thanks to solid business foundations.
Fortunately, industry conditions have improved recently, which could pave the way for future growth for ADM.
Archer Daniels Midland was founded in 1902 when George A. Archer and John W. Daniels started a flaxseed chopping business. In 1923, the Archer-Daniels Linseed Company acquired the Midland Linseed Products Company, which established the Archer Daniels Midland.
Today it is an agricultural giant. Archer-Daniels-Midland operates in 160 countries and has annual sales of over $ 64 billion.
The company produces a wide range of products and services to meet the growing demand for food due to the increasing population.
Source: Investor Presentation
The company operates four businesses: origination, oilseeds, carbohydrate solutions, and nutrition. The Oilseeds segment is the largest of Archer Daniels Midland.
Archer Daniels Midland is finally emerging from a prolonged downturn. The strong US dollar and the decline in agricultural commodity prices such as corn weighed on the company’s profitability for several years.
The good news is that thanks to cost control, Archer Daniels Midland remained profitable throughout the industry downturn. The company launched an aggressive cost-cutting program in 2015 that has achieved annual cost savings of $ 200 million through 2018.
In addition, industry conditions have finally improved, creating the conditions for a return to growth. Archer– –Daniels– –Midland reported its fourth– –Earnings for the quarter and the full year (FY) 2020 on January 26, 2021. In the fourth quarter, adjusted earnings per share decreased by 15% compared to the previous year. Sales increased 10% in the fourth quarter. For the full year, adjusted earnings per share increased 10.8% to $ 3.59.
ADM has not been seriously affected by COVID– –19 Pandemic as the company is viewed as an essential business. The management team is looking forward to the futureI expect the first quarter to be another strong one The positive momentum will continue until 2021. You also expect strong growth in the operating segment Profit and another record year of EPS in 2021.
Despite declining profitability, management remains optimistic about its outlook as it continues to advance its strategic growth initiatives in nutrition for health and sustainable materials.
For example, the ADM segment supplies Nutritiond Operating profit grew 37% for the fourth quarter, the sixth consecutive quarter of over 20% year-over-year profit growth. The nutrition stores include flavors, specialty ingredients, and Health.
Acquisitions are a key driver of ADM’s historic growth. The company has acquired several different companies over the past few decades to fuel its growth.
Source: Investor Presentation
Archer Daniels Midland also often sells low-growth companies to further improve its portfolio. Overall, the company has taken a number of actions to repair the ship over the past few years. For ADM, we expect earnings per share to grow 4% annually over the next five years.
Competitive advantage and recession performance
Archer Daniels Midland has built significant competitive advantages over the years. It is the largest corn processor in the world. This leads to economies of scale and increased efficiency in production and sales.
The company has a market cap of $ 32 billion, making it a large-cap stock. It is an industrial giant with ~ 450 plants sourcing locations, 320 food and feed processing plants, and 61 innovation centers.
In its innovation centers, the company researches and develops how to react more effectively to changes in customer demand and how to improve processing efficiency. Archer Daniels Midland has an unparalleled global transportation network that provides a tremendous competitive advantage.
The company’s global sales system offers the company high margins and barriers to market entry. This, in turn, enables Archer Daniels Midland to remain highly profitable even during the industry downturn.
Profits continued even during the great recession. Earnings per share during the Great Recession are shown below:
- 2007 earnings per share of $ 2.38
- 2008 earnings per share of $ 2.84, up 19%
- 2009 earnings per share of $ 3.06 (up 7.7%)
- 2010 earnings per share of $ 3.06
Archer Daniels Midland’s earnings per share rose in 2008 and 2009 during the Great Recession. Very few companies can boast such an achievement in one of the worst economic downturns in US history.
The reason for Archer Daniels Midland’s remarkable persistence in recessions may be that grain still has to be processed and transported regardless of the economic climate. There will always be some demand for Archer Daniels Midland products. From a dividend perspective, the payout looks pretty safe.
Valuation and expected return
Based on projected earnings per share of $ 3.83 in 2021, ADM stock trades for value for money of 15.1. Archer– –Daniels– –Midland has been rated at a value for money of 15.5 in the last decade. Our P / E at fair value is 15, which means the stock is fairly valued.
A declining valuation multiple could generate a -0.1% annual return for shareholders over the next five years. Future returns are also derived from earnings growth and dividends. We expect Archer Daniels Midland to grow its future earnings by ~ 4% per year through 2026 and the stock has a current dividend yield of 2.6%.
When that happens, the expected total return over the next five years is 6.5% per annum, a solid risk-adjusted return for Archer Daniels Midland stock.
Archer Daniels Midland has faced a difficult operating environment over the past few years. It is negatively impacted by weak commodity prices and the effects of the coronavirus pandemic.
With this in mind, the company has a long tradition of navigating challenging periods. It has continued to generate profits and reward shareholders with increasing dividends.
The stock trades at a reasonable valuation and pays a solid dividend yield of 2.8% plus annual dividend increases. As a result, Archer Daniels Midland appears to be a strong position for dividend growth investors.
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