Company Description: Archer-Daniels-Midland Co. is one of the world's leading agribusiness concerns, with major market positions in agricultural processing and merchandising.
Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value, see page 2 of the linked PDF for a detailed description:
1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number
ADM is trading at a premium to all four valuations above. The stock is trading at a 21.1% premium to its calculated fair value of $41.06. ADM did not earn any Stars in this section.
Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:
1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%
ADM earned one Star in this section for 2.) above. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. The company has paid a cash dividend to shareholders every year since 1927 and has increased its dividend payments for 39 consecutive years.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA) or Treasury bond? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
1. NPV MMA Diff.
2. Years to > MMA
The NPV MMA Diff. of the $306 is below the $500 target I look for in a stock that has increased dividends as long as ADM has. If ADM grows its dividend at 9.1% per year, it will take 8 years to equal a MMA yielding an estimated 20-year average rate of 3.08%.
Memberships and Peers: ADM is a member of the S&P 500, a Dividend Aristocrat, a member of the Broad Dividend Achievers™ Index and a Dividend Champion. The company's peer group includes: Bunge Limited (BG) with a 1.8% yield, Ingredion Incorporated (INGR) with a 0.0% yield and Griffin Land & Nurseries Inc. (GRIF) with a 0.7% yield.
Conclusion: ADM did not earn any Stars in the Fair Value section, earned one Star in the Dividend Analytical Data section and did not earn any Stars in the Dividend Income vs. MMA section for a total of one Star. This quantitatively ranks ADM as a 1-Star Very Weak stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $43.53 before ADM's NPV MMA Differential increased to the $500 minimum that I look for in a stock with 39 years of consecutive dividend increases. At that price the stock would yield 2.0%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $500 NPV MMA Differential, the calculated rate is 10.3%. This dividend growth rate is higher than the 9.1% used in this analysis, thus providing no margin of safety. ADM has a risk rating of 1.50 which classifies it as a Low risk stock.
ADM is a highly diversified agricultural commodity company with an extensive processing and distribution network. The company is dominant in its industry and creates value by processing crops sourced from farmers in its refineries, and leverages its extensive knowledge of the global market to generate trading revenue. Over time, the company's scale and integration should continue to help it gain market share. ADM should benefit from growing global demand for protein meal and vegetable oil and continued cost reduction. Its business is exposed to volatility in commodity prices.
In early August, ADM reported better-than-expected adjusted earnings per share for second-quarter 2014. The company’s adjusted quarterly earnings for the quarter rose 67.4% to $0.77 per share from $0.46 posted in the prior year comparable quarter. Driving the performance was strong ethanol demand as well as improvement in U.S. grain export volumes and the ongoing strength in demand for oilseeds products.
The company intends to return about $1.4 billion to shareholders in the form of dividends and share repurchases and invest another $1.4 billion in capital spending and small acquisitions in 2014, mostly outside the U.S. in high growth markets. ADM's focus on its processing capabilities and global expansion will provide for future growth.
Currently, ADM's debt and free cash flow payout are well within my acceptable levels. The stock is trading above my calculated fair value of $41.06 and its current yield is below my minimum acceptable level. For now, I will continue to watch from the sidelines for a better entry point.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I held no position in ADM (0.0% of my Dividend Growth Portfolio). See a list of all my dividend growth holdings my income holdings here.
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Tags: [ADM] [BG] [INGR] [GRIF]
