Monsanto: Make Me Believe, Increase Your Dividend
George is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Monsanto Company (NYSE: MON) recently announced encouraging financial news. Improved profitability, improved cash flow and improved cash position are all stacking up quite nicely. OK so now what? If management wants to maximize shareholder wealth and keep the long-term buy and hold investor interested, they'll need to boost the dividend and engage the market with promises of a certain payout. Currently they are offering a 1.56% dividend yield. Not exactly attracting the yield hounds is it? A major competitor Dupont (NYSE: DD) has roughly the same market cap with a 3.19% market yield. Looking further Syngenta (NYSE: SYT) with a slightly smaller market cap offers a 2.3% dividend yield.
Monsanto is unlikely to engage in serious financial engineering and repurchase very large quantities of its stock so as to back into a growing EBITDA. So the next logical financial move for Monsanto is to seriously increase its dividend in the very near future. Despite the nice earnings surprise analyst consensus has not shifted wildly. The official lists of institutional shareholders have the usual listing of index funds, but a notable lack of yield and or dividend investors is prevalent.
Monsanto has shown some glimmers of hope in the quality of their cash flow this quarter. Gross profit is up 1% to 57%. SG&A is down 1%. Most management teams would kill to generate these trends simultanously. Somewhat worrisome is a drop in R&D of 1%. However it all drives increasing levels of cash flow which both debt and dividend yield investors will prize.
When comparing Monsanto's shareholder base you'll note a real decrease in holdings by large value funds. Note the behaviour one would expect from an improving story. Check out Dupont in the very same category and you'll find growth in this category. Large value investors are more attracted to DuPont than Monsanto. If management decides to walk the dividend walk they will have to transition their MD&A to a more robust level. Currently they present like a marketing company talking about margins and market segments on a macro-economic level.
If Monsanto cannot transition to a dividend yield senior, the company will stay as an agriculture driven cyclical dependent on the weather and crop commodities futures.
George Gutowski writes from a caveat emptor perspective.
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