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 discount to only 3.) above. When also considering the NPV MMA Differential, the stock is trading at a slight premium to its calculated fair value of $42.96. 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 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 43 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 $463 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 4.7% per year, it will take 1 years to equal a MMA yielding an estimated 20-year average rate of 3.01%. ADM earned a check for the Key Metric 'Years to >MMA' since its 1 years is less than the 5 year target.
Peers: The company's peer group includes: Bunge Limited (BG) with a 2.8% yield, Ingredion Incorporated (INGR) with a 2.1% yield and Griffin Land & Nurseries Inc. (GRIF) with a 0.9% yield.
Conclusion: ADM did not earn any Stars in the Fair Value section, earned two Stars in the Dividend Analytical Data section and did not earn any Stars in the Dividend Income vs. MMA section for a total of two Stars. This quantitatively ranks ADM as a 2-Star Weak stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $43.81 before ADM's NPV MMA Differential increased to the $500 minimum that I look for in a stock with 43 years of consecutive dividend increases. At that price the stock would yield 3.1%.
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 4.9%. This dividend growth rate is above the 4.7% used in this analysis, thus providing a margin of safety. ADM has a risk rating of 1.25 which classifies it as a Med 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.
Currently, ADM's debt to total capital of 32% (up from 29%) is well within my acceptable levels, as is free cash flow payout of 32% (down from 34% in the last review). The stock is trading above my calculated fair value of $42.96. In the future, I will add to my ADM position as my allocation allows.
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 was long in ADM (6.4% of my High Dividend Growth Portfolio). See a list of all my Dividend Growth Portfolio holdings my Dividend Growth Portfolio holdings here.
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Tags: ADM, BG, INGR, GRIF,
