This is a guest contribution by Ben Reynolds and Nathan Parsh of Sure Dividend.
Agriculture is absolutely critical to civilization today. Continuous increases in crop efficiency have allowed the human race to grow to more than 7 billion people.
While some industries come and go, there’s no question the agriculture industry is here to stay for the long run. People need to eat, the global population is rising, and land is becoming increasingly more valuable.
All these factors mean that companies in the agriculture industry enjoy a backdrop of long-term stability absent in many other industries.
This article examines two of the top agriculture industry stocks that pay dividends available today. Interestingly, one is a Dividend Aristocrat because it is in the S&P 500 and has paid increasing dividends for 25+ consecutive years.
And the other is an established pharmaceutical and chemical company that has made a big move via acquisition in recent years into the agricultural chemical industry.
Top Agriculture Stock: Archer-Daniels-Midland (ADM)
With a market capitalization in excess of $20 billion, Archer-Daniels-Midland is the largest publicly-traded farmland products company in the U.S. The company has been in existence for more than 100 years. Today, Archer-Daniels-Midland’s business include the processing of cereal grains and oilseeds in addition to agricultural storage and transportation. Archer-Daniels-Midland generates $64 billion in revenue last year.
Archer-Daniels-Midland reported second-quarter earnings results on 8/1/2019. The company earned $0.60 per share, which was $0.05 below estimates and a 42% decline from the previous year. Revenue declined 4.5% to $16.3 billion, which was nearly $500 million lower than excepted.
Severe weather reduced profit by $65 million in the second quarter and $125 million for the first half of 2019. Operating profit totaled $682 million in the quarter so it is obvious that weather played a significant role in Archer-Daniels-Midland’s results.
Also impacting results was the ongoing trade war between the U.S. and China. Archer-Daniels-Midland stated on the conference call that trade tensions limited demand for products, especially for corn, in international markets. Export volumes and margins were both lower year-over-year.
Archer-Daniels-Midland has taken steps to optimize its business in the face of these headwinds. The company is undertaking cost saving initiatives to reduce its workforce through the elimination of positions or offering early retirement to certain workers in North America.
At the same time, Archer-Daniels-Midland is attempting to add attractive businesses through acquisition. For example, the company completed its acquisition of Ziegler Group, a leading European citrus flavor provider, during the second quarter. This acquisition makes Archer-Daniels-Midland a global leader in the growing natural citrus ingredients market.
Archer-Daniels-Midland has struggled to grow profitability over the last decade. EPS for 2018 was only slightly higher than in 2009. On the other hand, Archer-Daniels-Midland has improved book value per common share at a rate of 4.6% over this same period of time. Given that the company is in the process of streamlining its business and saw significant impairments during the second quarter that are largely out of its control, we feel that Archer-Daniels-Midland can continue to improve book value per common share by a rate of 4.5% through 2024.
Income investors might be surprised to learn that Archer-Daniels-Midland has increased its dividend for 44 consecutive years. This qualifies Archer-Daniels-Midland as a Dividend Aristocrat. You can see all 57 Dividend Aristocrats here.
Using the company’s annualized dividend of $1.40 and expected EPS for 2019 of $3.70, Archer-Daniels-Midland has a dividend payout ratio of 38%. This is close to the 10-year average payout ratio of 34%. The stock offers a current yield of 3.8%.
Archer-Daniels-Midland’s shares trade near $37 at the moment and has a book value per share of $34.50, giving the stock a price-to-book ratio of 1.1. This compares favorably to the stock’s 10-year average price-to-book ratio of 1.3. If the stock trades at this multiple by 2024, then shareholders would see an additional 3.4% in annual returns.
Total returns for Archer-Daniels-Midland would consist of the following:
- 5% book value per share growth
- 4% dividend yield
- 4% multiple expansion
Added up, we expect Archer-Daniels-Midland to offer a total annual return of 11.3% through 2024.
Bayer AG (BAYRY)
Bayer AG is a pharmaceuticals and chemicals company that develops and manufactures chemical materials and products for uses in the health care and nutrition sectors. Bayer operates five business segments: Pharmaceuticals, Consumer Health, Crop Science, Animal Health and Convestro, a chemical materials business. Bayer was founded in 1863 and is headquartered in Germany. U.S. investors can invest in Bayer through its American Depository Receipts. The company reports results in €, but all numbers in this article are reported in U.S. dollars. Bayer has a market capitalization of $65.5 billion, with annual revenues north of $45 billion.
In 2018, Bayer completed its purchase of Monsanto, a leading producer of genetically engineered crops. The company has discontinued the Monsanto brand and markets these products under the Bayer name in its Crop Science segment.
Bayer reported second-quarter earnings results on 7/30/2019. The company earned $0.45 per share, $0.01 below estimates and flat from the previous year. Revenue grew 16.2% to $12.9 billion, though this was $130 million lower than expected.
The company’s Crop Science division grew EBITDA 67% while sales improved 60% in local currency due to the Monsanto acquisition. On a comparable basis, however, sales were down 10%.
Like Archer-Daniels-Midland, Bayer also has experienced issues with weather and trade tensions. Many U.S. states saw record or above average precipitation in the first half of the year. Lower demand for agriculture products, particularly from China, is impacting crop planting. Corn acreage is expected to be down as much as 3% in the U.S. this year while soybean acreage will likely decline 7% to 10%.
Bayer’s ADR shares have grown at an annual rate of 8.3% from 2008 through 2018. Much of this growth occurred during the years immediately preceding the last recession. A strengthening U.S. dollar in recent years has also weighed on the company’s results. We anticipate that Bayer can grow EPS at a rate of 3.5% due to growth from the Monsanto purchase that is offset by headwinds from trade tension, severe weather and a stronger dollar.
Due to currency exchange, Bayer’s dividend has not been the most consistent over the past 10 years. The company did see year-over-year growth in six of those years, though 2019’s dividend is expected to be slightly lower than last year’s total. The annualized dividend of $0.78 and expected EPS of $1.94 implies a dividend payout ratio of 40% for the year. This compares favorably to the 10-year average payout ratio of 51%. Shares yield 4.5% at the moment.
Bayer trades at $17.50 today. Using expected EPS, this translates to a P/E ratio of 9. Shares of Bayer have traded within a wide range over the last decade, reaching as high as 31x earnings. We feel that a 2024 target P/E ratio of 11 is appropriate as that is in-line with recent results. If Bayer were to trade with this P/E ratio by 2024 then valuation would be a 4.1% tailwind to annual returns over this period of time.
Total returns for Bayer would include the following:
- 5% EPS growth
- 5% dividend yield
- 1% multiple expansion
We estimate that Bayer can return 12.1% per year over the next five years.
Both Archer-Daniels-Midland and Bayer AG are estimated to return more than 10% annually through 2024, which earns both companies a buy recommendation from Sure Dividend. The yield for each stock is almost twice that of the average yield of the S&P 500.
Both companies have struggled to grow due to a combination of weather and trade tensions with China.
Of the two stocks, we feel that Archer-Daniels-Midland is more attractive for investors seeking consistent income and less volatility in earnings. Investors with a higher risk tolerance could be intrigued by Bayer’s higher total return projections.
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