Friday, October 21, 2011

Archer-Daniels-Midland (ADM) Dividend Stock Analysis

Archer-Daniels-Midland Company (ADM) procures, transports, stores, processes, and merchandises agricultural commodities and products in the United States and internationally. Archer-Daniels-Midland is a dividend aristocrat, which has paid uninterrupted dividends on its common stock since 1927 and increased payments to common shareholders every year for 36 years.

The most recent dividend increase was in February 2011, when the Board of Directors approved a 6.70% increase in the quarterly dividend to 16 cents/share. Archer Daniels Midland ’s largest competitors include Bunge (BG), Corn Products Intl (CPO) and Griffin Land and Nurseries (GRIF).

Over the past decade this dividend growth stock has delivered an annualized total return of 8.80% to its shareholders.

The company has managed to deliver a 16.70% annual increase in EPS since 2002. Analysts expect Archer-Daniels-Midland to earn $3.07 per share in 2012 and $3.40 per share in 2013. In comparison Archer-Daniels-Midland earned $3.13 /share in 2011.

The company plans to spend almost $2 billion on capex and acquisitions. The company has been able to expand commodity processing capacities through acquisitions, new plant construction and plant expansions. A recovering global economy might increase export demand, which would provide sufficient growth for the company’s corn processing operations. Increased demand for soft drinks and snack foods will be beneficial for ADM’s high-fructose corn syrup business.

The company’s Returns on Equty has been quite volatile, and closely followed the volatility in EPS. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

The annual dividend payment has increased by 13.30% per year over the past decade, which is lower than the growth in EPS.

A 13% growth in distributions translates into the dividend payment doubling every five and a half years. If we look at historical data, going as far back as 1990 we see that Archer-Daniels-Midland has managed to double its dividend almost every 5 years on average.

The dividend payout ratio has been on the decline since 2002. Lately it has stabilized around 20%, which is very conservative. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently Archer-Daniels-Midland is attractively valued and is trading at 8.90 times earnings, yields 2.30% and has a sustainable forward dividend payout. I would add to my position subject to availability of funds on dips below $25.60/share.

Full Disclosure: Long ADM

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