Can Monsanto Company Fertilize Investors’ Portfolios?

By Ryan Guenette - September 13, 2012 | Tickers: DD, FMC, MON, SYT, SMG | 0 Comments

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America’s “breadbasket” is shriveling up. The country’s most fertile and efficient farmland is yielding no returns to its menders, as a historical drought has enveloped the nation. Farmers are realizing the full destructive forces of nature, and have already begun to turn to companies that offer more advanced and sophisticated breads of seeds. One major company in the agricultural sector is Monsanto (NYSE: MON). Monsanto is a provider of agricultural products to farmers. Their offerings include seeds, biotechnology trait products, and herbicides that provide farmers with solutions that improve productivity, reduce the cost of farming, and produce better foods for consumers and better feed for animals. The company employs 21,000 and is valued at $46.43 billion. Over the past year, Monsanto has rallied 32.39%, outperforming the S&P 500, which has rallied only 19.80%. So can Monsanto Company fertilize investors’ portfolios?

Flourishing Fundamentals

In 2001, Monsanto Company reported earnings per share of $0.57. In 2011, the company stated that it had derived $3.00 per share from its business operations. This represents a 426.32% increase in earnings per share over the course of a decade that runs through the financial collapse of 2008, and the aftermath of the terrorist attacks of 2001. Based on these statistics, Monsanto’s compound annual growth rate (CAGR) is 18.07%, an astonishing rate for any company of any size. Monsanto’s top and bottom lines have grown over the past decade, representing a financially healthy company that is expanding at a sustainable pace. Analyst projections show Monsanto’s earnings growing at an accelerated double digit growth rate into the coming years, putting 2014’s earnings at $4.92. Additionally, the company pays out a rewarding dividend to its shareholders. Currently, Monsanto pays out quarterly dividends of $0.30, or an annual dividend of $1.20, which at current prices, puts the company’s dividend as yielding 1.38%. This is up from 2011’s annual dividend of $1.12, and is expected to remain steady into the future. From this we can see Monsanto’s underlying long-term financial strength, annualized double digit growth rate, and decently sized dividend.

The chart below displays Monsanto Company’s sales, operating profit, net income, net margin, operating margin, earnings per share, dividend, and rate of dividend (the percentage of net income that is paid out in the dividend) over the coming years.

Courtesy of Zonebourse.com

The World Is Evolving, So Is Our Food Supply

As of 2011, there are 6,973,738,433 people on the face of the Earth. Every single one of these people needs to be feed food. While the population of the world has been going up in a vertical line, the amount of farmable land is dwindling, as much has been lost to pollution and urbanization. Farmers desperately are trying to meet growing demands; however traditional seeds are simply not able to yield enough. Traditional seeds are prone to drought, invite insects to eat them, and do not produce as much crop. Monsanto offers seeds that are genetically engineered to be drought-resistant, drive away pests, and pay dividends much larger than traditional seeds. There is no denying the fact that one day there will be only small pockets of farmers that have not converted to genetically engineered seeds, massively benefiting Monsanto, which will provide these farmers with seeds year after year. The chart below displays the world population’s drastic growth.

The drought engrossing the majority of the United States of America is a historical occurrence. Farmer’s livelihood is drying and shriveling up right before their eyes. The chart below displays the full impact of this historical drought.   

Courtesy of the National Drought Mitigation Center

This recent occurrence will just add more demand for Monsanto’s drought-resistant seeds, as farmers finally fully comprehend their advantages. The recent drought should give a sizeable boost to Monsanto’s earnings in the coming year.  

Who Is the Industry Innovator?

Compared to some of Monsanto’s most prominent competitors, such as: E I Du Pont De Nemours and (NYSE: DD), Syngenta (NYSE: SYT), FMC (NYSE: FMC), and Scotts Miracle-Gro (NYSE: SMG), Monsanto compares relatively favorably.

In terms of growth, Dupont is the industry leader, while Scotts is the industry laggard. All companies in the industry pay out dividends, with Dupont possessing the largest dividend, and Scotts possessing the fastest growing dividend. In the fundamental ratio, Dupont is the industry bargain, while Scotts trades at a premium to its peers. When growth is taken into account, Sygenta is the industry bargain, while Scotts is once again pricy. In the net profit margin comparison, Monsanto stands out to the upside, while Scotts stands out to the downside.

The Foolish Bottom Line

Monsanto is a massive company that is highly diversified, but is not immune to recessions. When economic conditions take a nose dive, farmers are less willing to purchase the expensive Monsanto seeds. However these genetically modified seeds are the future of farming, as there is a surplus of people, and a dwindling supply of fertile farm land. The company’s financial strength is tremendous and the company possesses an annualized double digit growth rate. The company’s dividend is decently sized and is a little icing on the cake. Compared to its peers, Monsanto compares relatively favorably. Additionally, the recent drought in the “breadbasket” of the United States will further push farmers to purchase Monsanto’s seeds. The foolish bottom line is Monsanto is an incredible play on feeding the world into the future, and can certainly fertilize investors’ portfolios.

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