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 21.5% premium to its calculated fair value of $41.17. 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 45 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 $267 is below the $500 target I look for in a stock that has increased dividends as long as ADM has. The stock's current yield of 2.88% exceeds the 2.74% estimated 20-year average MMA rate.
Peers: The company's peer group includes: Bunge Limited (BG) with a 2.8% yield, Ingredion Incorporated (INGR) with a 3.4% yield and INDUS Realty Trust, Inc. (INDT) with a 3.0% 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 increase to $41.66 before ADM's NPV MMA Differential decreased to the $500 minimum that I look for in a stock with 45 years of consecutive dividend increases. At that price the stock would yield 3.5%.
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 4.7%. This dividend growth rate is above the 2.9% used in this analysis, thus providing no margin of safety. ADM has a risk rating of 1.5 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.
Currently, ADM's debt to total capital of 31% (down from 32%) is well within my acceptable level. However, the free cash flow payout of -25% (-13% in the last review) is not sustainable. The stock is trading well above my calculated fair value of $41.17. Before considering a position in ADM, I would like to see the Free Cash Payout improve.
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 Stocks Portfolio).
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Tags: ADM, BG, INGR, GRIF,
