Linked here is a detailed quantitative analysis of Monsanto Co. (NYSE:MON). Below are some highlights from the above linked analysis:
Company Description: Monsanto Co. is a global provider of agricultural products and integrated solutions for farmers.
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
MON is trading at a premium to all four valuations above. The stock is trading at a 134.0% premium to its calculated fair value of $48.83. MON 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%
MON earned two Stars in this section for 1.) and 2.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. The company has paid a cash dividend to shareholders every year since 2001 and has increased its dividend payments for 12 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 negative NPV MMA Diff. means that on a NPV basis the dividend earnings from an investment in MON would be less than a similar amount invested in MMA earning a 20-year average rate of 3.31%. If MON grows its dividend at 6.8% per year, it will never equal a MMA yielding an estimated 20-year average rate of 3.31%.
Memberships and Peers: MON is a member of the S&P 500 and a member of the Broad Dividend Achievers™ Index. The company's peer group includes: The Mosaic Company (NYSE:MOS) with a 2.0% yield, Potash Corp. (NYSE:POT) with a 4.1% yield and Syngenta AG (NYSE:SYT) with a 2.2% yield.
Conclusion: MON 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 MON as a 2-Star Weak stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $37.67 before MON's NPV MMA Differential increased to the $2,300 minimum that I look for in a stock with 12 years of consecutive dividend increases. At that price the stock would yield 4.6%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $2,300 NPV MMA Differential, the calculated rate is 16.9%. This dividend growth rate is significantly higher than the 6.8% rate used in this analysis, thus providing no margin of safety. MON has a risk rating of 2.00 which classifies it as a Medium risk stock.
The company enjoys a relatively low exposure to economic cycles, consistent cash flows and owns a promising pipeline of seed products. MON is well positioned to continue its turnaround with the introduction of next-generation seeds and increased penetration of international markets like South America, which could lead to above-average earnings growth.
Last week MON reported improved results for its second fiscal quarter ended February 28, 2014, with year-over-year improvement in revenues, earnings and gross profit margin. Based on the improved performance, management reaffirmed its expectations for fiscal 2014. The company expects to experience 15 to 20 cents headwinds from foreign currency impacts. In addition, management reaffirmed free cash flow in the range of $600.0 to $800.0 million.
With low debt and a low free cash flow payout ratio, MONs dividend fundamentals are desirable. However, the stock is trading well above my calculated fair value of $48.83 and with a yield of 1.5%, it is currently not a serious contender for any of my income portfolios.
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 MON (0.0% of my Dividend Growth Portfolio). See a list of all my dividend growth holdings here.
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