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. When also considering the NPV MMA Differential, the stock is trading at a 43.1% discount to its calculated fair value of $83.58. ADM earned a Star in this section since it is trading at a fair value.
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 two Stars in this section for 2.) and 3.) above. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. ADM earned a Star for having an acceptable score in at least two of the four Key Metrics measured. The company has paid a cash dividend to shareholders every year since 1927 and has increased its dividend payments for 40 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
ADM earned a Star in this section for its NPV MMA Diff. of the $2,852. This amount is in excess of the $500 target I look for in a stock that has increased dividends as long as ADM has. If ADM grows its dividend at 13.0% per year, it will take 1 years to equal a MMA yielding an estimated 20-year average rate of 2.47%. ADM earned a check for the Key Metric 'Years to >MMA' since its 1 years is less than the 5 year target.
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 1.5% yield, Ingredion Incorporated (INGR) with a 2.0% yield and Griffin Land & Nurseries Inc. (GRIF) with a 0.6% yield.
Conclusion: ADM earned one Star in the Fair Value section, earned two Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of four Stars. This quantitatively ranks ADM as a 4-Star Strong stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $99.10 before ADM's NPV MMA Differential decreased to the $500 minimum that I look for in a stock with 40 years of consecutive dividend increases. At that price the stock would yield 1.1%.
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 6.1%. This dividend growth rate is below the 13.0% used in this analysis, thus providing a 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. Its business is exposed to volatility in commodity prices.
The Environmental Protection Agency (EPA) proposal to lower renewable fuel usage could be a long-term negative for U.S. ethanol producers such as ADM. Positively offsetting this are business portfolio changes such as ADM's October 2014 acquisition of WILD Flavors, the acquisition of Specialty Commodities Inc. and agreements to sell its chocolate business and its South American fertilizer business. The new Flavors and Specialty Ingredients segment should improve ADM's sales and margin.
In early February, ADM reported adjusted earnings per share of $1.00, up from $0.95 in the same period last year. Adjusted segment operating profit was $1.13 billion, up 8 percent from $1.04 billion in the year-ago period. For the calendar year, adjusted earnings per share of $3.20 were up 37 percent versus the prior year. The company returned over $1.8 billion to shareholders in 2014 in the form of dividend payments and share repurchases, with ADM buying back over 9 million shares in the fourth quarter alone.
Currently, ADM's debt and free cash flow payout are well within my acceptable levels. The stock is trading below my calculated fair value of $83.58. However, its current yield is below my minimum yield, so I will continue to watch from the sidelines for now.
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,