Archer Daniels Midland Dividend – Slowing Or Growing?
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
If you are a farmer or in any industry related to agriculture you probably know Archer Daniels Midland (NYSE: ADM). The company is probably just as well known in the stock market for having increased its dividend for at least 25 straight years. However, if the market of the last few years has taught us anything, it's that companies change, and records are made to be broken. Let's look at whether ADM can continue its dividend streak and whether dividend growth is slowing down or speeding up.
Before looking at dividends, let's compare the company to one of its competitors Bunge Limited (NYSE: BG). This should give us an idea of the company's valuation. If the company is fairly valued, then its dividend and potential increases are important. If the stock is overvalued, then it might be a better idea to wait for a pullback to buy shares.
|
Name |
P/E On '12 Earnings |
Growth Expected |
Yield |
Free Cash Flow Per $1 of Assets |
|
Archer Daniels Midland |
12.35 |
5.65% |
2.20% |
$0.03 |
|
Bunge |
8.97 |
9.53% |
1.83% |
$0.06 |
As you can see, ADM appears slightly overvalued if you compare its P/E, growth rate, and free cash flow generation. It's possible that part of its valuation is based on the company's dividend growth. We need to look at the trajectory of the company's payout ratio and dividends to get a better idea of what to expect in the future.
When it comes to measuring a company's ability to increase their dividend in the future, we first have to know if they can afford their current payout. Looking at the ADM's free cash flow payout ratio, in the last three years there is a very disturbing trend:
|
Year |
2009 |
2010 |
2011 |
|
Free Cash Flow Payout |
10.08% |
34.54% |
95.64% |
You can see in the last three years, the company's payout ratio has steadily increased. In addition, this 2011 payout percentage was only 95% if you adjust for large inventory and other adjustments. Without these adjustments, the payout ratio would have been negative. This should be a red flag to investors, and is something to keep a close watch on.
Where dividend growth is concerned, you can see how ADM has increased dividends over the last several years:
From 2006 to 2011 dividend growth slowed nearly every year in sequential order. In 2012 this rate of growth picked up, but given our findings about the company's payout ratio, this rise is likely short lived. So what should investors expect going forward?
If analysts are correct and the company grows earnings at just under 6%, I would expect that dividend growth would closely mirror earnings growth. I would realistically expect increases in the 4-6% range in the future. This is based on the fact that the company is already paying a large amount of their free cash flow in dividends. ADM scores 5 out of 5 stars on Motley Fool CAPS. Most of the positive arguments are centered around P/E ratio, dividends, and book value. This is one of the few times I'm going to disagree with the CAPS community. A company with a yield of just 2.2% that is expected to grow at under 6% is about as exciting as watching corn grow. There are even utilities that offer a better mix of growth and dividend yield at this point. I would avoid ADM until either a drop of 10% or more in the current price, or until the company's free cash flow payout ratio looks more sustainable. Let me know what you think in the comments section below.
MHenage has no positions in the stocks mentioned above. The Motley Fool owns shares of Archer Daniels Midland Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
