It sounds simple enough on paper - just increase your dividend every year for 50 years and you become known as a Dividend King. However, business never stays easy for decades, so only 48 out of the many thousands of publicly traded companies can claim this distinction.
Archer-Daniels-Midland Company (ADM, Financial), more commonly known as ADM, achieved that milestone this year when it increased its quarterly dividend from $0.40 to $0.45. But there’s more to this company than just a rising dividend - it's also a growth stock with solid fundamentals.
About ADM
The company’s history goes back to 1902, when George A. Archer and John W. Daniels founded a linseed crushing business. Today, the Chicago, Illinois-based business has a market cap of $44.86 billion and trailing 12-month revenue of $101.848 billion.
In its 10-K for 2021, the company called itself “a global leader in sustainable human and animal nutrition, one of the world’s premier agricultural origination and processing companies, and an innovator in creating sustainable solutions in agriculture, energy, and bio-based alternatives to materials and fuels currently produced from petroleum products.”
It operates through three segments:
- Ag Services and Oilseeds: origination, merchandising, transportation and storage of agricultural raw materials, as well as the crushing and processing of oilseeds.
- Carbohydrate Solutions: Wet and dry milling of corn and wheat, mainly. The outputs from milling include products and ingredients such as sweeteners, starches and wheat flour.
- Nutrition: Manufacturing, selling and distributing a wide array of ingredients and solutions. These products go into food, beverage, nutritional supplements, feed and premix for livestock, aquaculture and pet food.
As this slide from the third-quarter 2022 investor presentation shows, Ag Services and Oilseeds is the biggest profit-maker:
Competition
ADM reported in its annual filing that it faces significant competition based mainly on price, currency exchange rates, quality, global supply and alternative products. It added that because of the commodity nature of many of its businesses, it focuses on managing unit costs and improving efficiency. That latter is accomplished through technology improvements, productivity enhancements and regular assessments of its asset portfolio.
Presumably, those cost and efficiency improvements would be two of its key competitive advantages. The company also has its global footprint, scale and experience.
Despite those advantages, it has had trouble keeping up with the S&P 500 as well as the S&P Consumer Staples Index:
Financial strength
Based on the GuruFocus criteria in the chart below, ADM receives a financial strength ranking of 7 out of 10:
As the above table suggests, the company carries a significant amount of debt (think inventory and manufacturing facilities). Not surprising since it is asset heavy.
The interest coverage ratio at 10.64 is acceptable, but only slightly better than the industry average of 9.71. However, it is better now than it has been in the past.
Profitability
Based on the factors listed below, ADM scores an 8 out of 10 ranking for profitability:
The operating margin, currently at 4.14%, is about average for the industry, but significantly better than where it has been in the past. The trend is headed in the right direction:
The Piotroski F-Score is very high at 8 out of 9. The consistency of profitability has been mediocre, but shareholders will have been pleased over the past three years as earnings per share without non-recurring items leapt past the trendline:
Growth
Another high ranking for ADM is its growth ranking of 9 out of 10. That’s based on its three-year and five-year revenue growth rates, the predictability of that revenue stream and its five-year Ebitda growth rate:
This 10-year chart shows that revenue has been predictable over the past three years. But over the past 10 years, it has been anything but predictable or consistent. Still, the growth ranking is based on what’s happened over the past three and five years:
The Ebitda chart has a similar droop and recovery, and to some extent, that’s also true of the EPS without NRI chart shown prior.
The free cash flow chart diverges from revenue and Ebitda because it pulled back significantly in 2022. According to its fourth quarter and full-year 2022 earnings report, it posted less favorable results in two of three sources of cash flow. Operating activities brought in roughly $3 billion less, investing activities bucked the trend by posting less of a loss and financing activities incurred a bigger loss.
According to Morningstar (MORN, Financial) analysts, ADM is expected to show revenue of $101.848 billion for 2022 when fourth quarter and full-year 2022 earnings come out later this week. Short- and long-term debts are expected to add up to $9.180 billion.
Dividends and share repurchases
ADM became a Dividend King earlier this year, with its 50th annual and consecutive increase. The forward dividend yield, at 2.18% is slightly higher than the S&P 500 long-term average of 1.85%. That’s well below the nearly 4.4% it registered before the share price picked up steam:
The dividend payout ratio is a comfortable 0.21, leaving lots of room for future increases. The three-year dividend growth rate averages 4.60%, while the five-year growth rate has averaged 4.20%.
ADM bought back shares quite aggressively in 2015, 2016 and 2017. While it has continued to buy back shares since then, it has been at a much slower rate.
Valuation
Based on its price to GF Value ratio, ADM receives a GF Value rank of 6 out of 10. Its Feb. 13 closing price was $81.90 versus the GF Value of $87.79.
Its price-earnings ratio of 10.62 is cheaper versus the industry’s median of 17.88.
Dividing the price-earnings ratio by the five-year average Ebitda growth rate of 16.30% per year produces a PEG ratio of 0.65. That suggests the stock is undervalued compared to its growth.
This 10-year chart suggests the stock may be overvalued based on its historical trendline:
Gurus
Nine gurus owned shares of ADM as per their most recent 13F reports as of this writing. The top three were Tom Gayner (Trades, Portfolio) of Market Gayner Asset Management (1,463,300 shares), Murray Stahl (Trades, Portfolio) of Horizon Kinetics (1,015,230 shares) and Mario Gabelli (Trades, Portfolio) of GAMCO Investors (362,905 shares).
The company receives significant support from institutional investors, who held 87.23% of the shares outstanding, while insiders owned 2.64%. Among the insiders, president and CEO Juan R. Luciano had the biggest holding, 762,330 shares as of Jan. 25.
Conclusion
Archer-Daniels-Midland has done what many companies can only dream of doing. It has become a Dividend King, and only a company with great staying power could achieve that distinction. There is moreto the story, though, because this is a company that has robustly beefed up its top and bottom lines over the past few years and looks undervalued based on several metrics.
