Written by Bob Ciura for Sure Dividend
When investors are looking for their next great dividend stock, they tend to gravitate towards areas of the market that generally house income stocks. These include areas like consumer staples, utilities, and banks, as examples. However, overlooking certain sectors can mean missing out on great companies with terrific dividend histories.
One such sector that may not immediately come to mind is agriculture stocks, some of which can be quite cyclical. However, the best of the best have great dividend stock potential, and in this article, we’ll take a look at three examples of agricultural companies with consistent business models and dividend growth.
Andersons Inc. (ANDE)
Our first stock is Andersons, an agriculture company that operates in Trade, Renewables, and plant Nutrient segments. The Trade segment operates grain elevators and stores, provides grain marketing, risk management, merchandising, logistics services, and more. The Renewables segment produces, purchases, and sells ethanol and related products, as well as offering facility operations, and ethanol marketing services. The Plant Nutrient business manufactures, distributes, and sells agricultural and related plant nutrients, lime and gypsum products, crop protection chemicals, and other related products.
Andersons was founded in 1947, generates about $16 billion in annual revenue, and trades with a market cap of $1.1 billion.
Andersons has decades of experience operating in all kinds of economic environments, but one thing that has stayed constant is its ability to generate revenue and earnings consistently. The company’s products are always in demand given they are highly sought after commodities, but its model is diversified. It has service businesses, in addition to storage and logistics revenue streams, in addition to actual commodities. Andersons is, therefore, not a pure commodities business, but that has helped it generate enough earnings to raise its dividend for an impressive 26 consecutive years.
That puts Andersons in rarified company when it comes to small caps, but also given it’s an agricultural business. That’s certainly one of the reasons we like the company, and indeed the stock.
Today the stock yields 2.2%, which is about 60 basis points better than that of the S&P 500. That makes Andersons a decent income stock, but where it shines is in its dividend growth prospects. We see the current payout of 72 cents per share annually rising to 88 cents in the next five years, continuing the company’s long tradition of increasing cash payouts to shareholders.
We see 5% earnings-per-share growth as helping to generate the capital necessary for this dividend growth, although near-term that growth will be more difficult to come by. The company benefited from the war in Ukraine given that region of the world produces a huge amount of agricultural commodities. That tailwind is fading, thankfully, but it means Andersons may see a year or two of negative growth. We believe this would be transitory, should it occur.
The stock trades at about 11 times earnings today, well below our estimate of fair value at 22 times earnings. That tailwind, combined with the 2.2% yield and 5% growth means we expect to see at least 20% total returns annually for the next five years.
Scotts Miracle-Gro Company (SMG)
Our next stock is Scotts Miracle-Gro, which is a provider of products related to agriculture, rather than the commodities themselves. Scotts produces and distributes a huge variety of products for lawn and garden care, indoor and outdoor plants, fertilizers, spreaders, cleaners, weed and pest control products, and even rodent repellent products. The company owns highly recognizable brands, including Turf Builder, Roundup, Tomcat, Ortho, and more.
The company was founded in 1868 and rose to prominence in the past couple of years as its products became extremely popular among cannabis growers. The company’s share price roughly quadrupled over a two-year period, but it has since given back all of those gains and more. Now, it trades with a market cap of just $3 billion, and generates about $4 billion in annual revenue.
Scotts has built a long list of very lucrative and recognizable brands in several areas of agricultural care, including popular consumer-facing brands for lawn care and maintenance. This normally affords Scotts fairly steady mid-single digit growth, but the company’s growth exploded in the past couple of years on the cannabis tailwind. Earnings-per-share rose from $1.13 in 2018 to $9.20 last year. That sort of growth is quite obviously unsustainable, but we see 7% growth accruing annually in the years ahead from this year’s much lower base of earnings.
Scotts has a shorter dividend increase streak than Andersons, but it’s still quite respectable at 12 years. In addition, in the past decade the average increase has been 8%, so it’s raising the payout quite rapidly. The payout ratio is just over half of this year’s earnings, so we think the company can continue to raise its payout for years to come.
The yield today is also now up to a whopping 4.9%, putting Scotts in rarified company on that measure. Given its dividend growth history, dividend growth prospects, and the nearly-5% yield, we see Scotts as a premier dividend growth stock today.
Shares trade for just over 11 times this year’s earnings, which is well below our estimate of fair value at 15 times earnings. That could drive a mid-single digit tailwind, similar to the yield and earnings growth. All told, we expect 16%+ total annual returns in the years to come.
FMC Corp. (FMC)
Our third stock is FMC Corporation, an agricultural sciences company that provides crop protection, plant health, and pest and turf management products. This includes a long list of insecticides, herbicides, and fungicides, as well as crop nutrition and seed treatment products, and more.
The company was founded in 1883, produces about $5.6 billion in annual revenue, and trades with a market cap of $13.3 billion.
FMC’s business model has shown consistency through its decades of serving a wide variety of agricultural companies that rely upon FMC’s products to generate the best yields for themselves. FMC has a long history of suitable produces for a huge variety of applications, and it has the distribution network to take advantage of this ever-growing demand.
The dividend increase streak stands at just four years, as the company paused dividend increases for a four-year period before resuming raises again. Still, the past decade has seen an average annual increase of almost 20%. On this measure, FMC has been outstanding.
The current yield is 2%, so it’s somewhat better than the broader market. We expect further increases, given the payout ratio is under 30% of earnings for this year, and we expect robust 7% annual earnings growth. This combination should see the dividend much higher in the years to come, and we’re forecasting the current $2.12 payout to become $3.41 in five years’ time.
Shares trade for about 14 times this year’s earnings, meaningfully below our estimate of fair value at 17 times earnings. That could drive a modest tailwind, and in conjunction with 7% earnings growth and the 2% yield, we expect to see about 13% total annual returns in the next five years.
Final Thoughts
While investors may not immediately think of agriculture stocks when looking for great dividend payers, there are some that are worth a look. We like Andersons, Scotts, and FMC because they’ve all demonstrated longevity and consistency over time. Andersons has a very long dividend increase streak, Scotts has a nearly-5% yield, and FMC has been an extraordinary dividend growth stock.
Each offers its own attractive traits, but all three are agriculture dividend growth stocks we like for their consistency.
