Investors value dividend stocks because of the regular income they provide. Most stocks that pay dividends, do so on a quarterly basis. While there are some stocks that pay dividends annually, semi-annually, or monthly, the typical dividend schedule is once per quarter. Investors can find a number of stocks that pay dividends in any given month.
For example, Archer Daniels Midland (NYSE:ADM) pays a quarterly dividend and will pay its next dividend in September. Archer Daniels Midland is especially appealing as an investment for dividend growth investors, as the company has raised its dividend for over 40 consecutive years.
Shares of ADM currently yield 3.2%. Considering the broader S&P 500 Index has an average yield below 2% right now, ADM is a strong income stock by comparison. With a positive long-term growth outlook along with annual dividend increases, ADM is an attractive stock for dividend growth.
Business Overview and Recent Earnings
Archer-Daniels-Midland is a giant agricultural origination and processing company. It is the largest publicly-traded farmland product company in the United States. The company now trades with a market capitalization of $25 billion. Archer-Daniels-Midland’s businesses include processing of cereal grains and oilseeds, as well as agricultural storage and transportation.
ADM has performed well in 2020, given the significantly negative impact of the coronavirus pandemic on the broader economy. ADM reported second-quarter earnings results in which adjusted earnings-per-share increased 41% to $0.85 versus the year-ago quarter. Revenue was fractionally lower at $16.28 billion, but the company meaningfully expanded the bottom line thanks to cost savings and business optimization efforts. Top-performing segments included Nutrition with 41% revenue growth and Ag Services and Oilseeds with 51% growth. The Nutrition businesses include flavors, specialty ingredients, and health & wellness.
Competitive Advantages Lead To Long-Term Growth
ADM has positive long-term growth potential, due to rising global populations and increasing demand for food. Separately, the company will be a beneficiary of new eating trends such as alternative proteins, which have resulted in strong growth in ADM’s nutrition segment over the past several quarters. We expect 4% annual EPS growth over the next five years for ADM.
A competitive advantage is a key component of what to look for when learning how to buy stocks for the long run. Archer-Daniels-Midland has a significant competitive advantage in terms of its industry dominance. ADM’s core Ag Services & Oilseeds segment manages ~10% of global agriculture commodity volumes. The company has approximately 60 different oilseeds products, and possesses over 120 processing assets in 16 countries around the world. It also has over 480 crop procurement locations and nearly 350 food and feed processing centers. ADM also operates over 50 innovation centers to help produce long-term growth.
This kind of geographic scale provides ADM with the ability to generate steady profits, even when operating in a cyclical industry. ADM also has a strong balance sheet with a strong credit rating of ‘A’ from Standard & Poor’s, which serves as a competitive advantage as it helps the company raise capital at favorable costs.
Despite the fact that it operates in a cyclical industry, ADM holds up fairly well during recessions. During the Great Recession, the company reported earnings-per-share of $2.84 in 2008 and $3.06 in both 2009 and 2010. ADM remained strongly profitable during the recession, and grew its earnings-per-share by ~8% in 2009, a highly impressive performance. Its global competitive advantages and defensive business model have allowed ADM to raise its dividend for 45 consecutive years.
ADM has a positive long-term growth outlook. The company has multiple growth catalysts, such as the rising global population. Led by emerging markets such as China and India, the world’s population is expected to continue rising. Estimates currently project the global population will rise to 9.7 billion by 2050, compared with 7.7 billion in 2019. An additional 2 billion people on the planet will inevitably result in higher demand for food. As a global agricultural processing company, ADM will play a vital role in feeding the world’s growing population.
Second, changing consumer trends will fuel ADM’s future growth. Specifically, ADM is benefiting from rising demand for alternative proteins, and probiotics. Within ADM’s nutrition segment, it provides specialty ingredients such as soy and pea proteins, which are seeing stronger demand as consumers increasingly opt for alternatives to meat.
Attractive Dividend Yield And Long History Of Dividend Increases
ADM company management expects full-year earnings per share of approximately $3.02 for 2020. Based on this, the stock trades for a price-to-earnings ratio of 15.1, which is virtually on par with the 10-year average P/E of 15.2x. Therefore, the stock appears to be fairly valued, compared with its historical average. Nevertheless, we believe investors can still earn satisfactory returns through earnings-per-share growth and dividends. For example, if the company can generate high single-digit earnings growth, total returns could reach 10% per year including the 3.2% dividend yield.
The company’s dividend is another reason to be positive on the stock. ADM has a long history of paying its dividend, and raising the dividend on a regular basis. ADM has declared 355 consecutive quarterly dividends to shareholders, an 88-year streak of uninterrupted dividend payouts. It has also increased its dividend for more than 40 years in a row, qualifying the stock for inclusion on the exclusive Dividend Aristocrats list.
Importantly, ADM’s dividend is highly secure. With an annualized dividend payout of $1.44 per share, the company has a projected dividend payout below 50% for 2020. This indicates a sufficiently covered payout, as the company can easily afford the payout based on expected 2020 earnings-per-share. ADM’s dividend payout ratio rose substantially between 2009 and 2017, but that was when the payout ratio peaked at the 60% level in 2017. Thanks to strong earnings-per-share growth since 2018, the dividend payout ratio declined considerably and remains at comfortable levels. Also, because the company’s profits have typically held up well during recessions, we believe that the dividend is quite safe.
Final Thoughts
The past year has been extremely challenging for many sectors, but high-quality Dividend Aristocrats like ADM continue to reward shareholders with steady growth and dividends. ADM has a dividend yield above 3% which is attractive in a low interest rate environment, and a long history of raising its dividend each year. We believe the stock has a positive long-term outlook, making it a potential investment opportunity for dividend growth investors.