ADM – A dividend stock to own for the long term

Contents

ADM company overview

Investment strategy

A few notes from the last conference call

My personal opinion

I analysed Bunge, as it seems like the cheaper stock between the two, but ADM looks like a better business.

ADM company overview

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Source: ADM investor presentation

Unlike Bunge, they grow by acquiring smaller players and including them into their business model and possibly scaling the smaller acquisition.

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Source: ADM investor presentation

Operating profits are stable.

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Source: ADM investor presentation

And earnings per share too.

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Source: ADM investor presentation

The return on capital is 300 basis points (3%) higher than Bunge’s and 200 basis points above their cost of capital.

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Source: ADM investor presentation

They plan to increase the dividend pay-out ratio by 30% in the medium-term range.

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Source: ADM investor presentation

The increased dividend payout should lead to constantly higher dividend yields. Thus, what is now 3.24%, could quickly become 5%. 

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Source: ADM investor presentation

The last dividend is their 349th consecutive quarterly payment and an uninterrupted record of 87 years.

Net debt is smaller than Bunge’s and the available liquidity allows for flexibility. 

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Source: ADM investor presentation

Investment strategy

If ADM continues to grow as it did in the past given that it has the foundations to do so, plus the acquisition potential, I would assume its operating profits could reach $5 billion per year over the next 10 years.

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Source: ADM investor presentation

This also means that distributions to shareholders would be 50% higher than in the last 10 years where the dividends paid out were $5.5 billion and buybacks $6.1 billion. Thus, over the next 10 years, allowing for the normal cyclicality in the food sector, I would say ADM could return at least $15 billion to shareholders. That implies a 6.5% dividend and buyback yield. 

Also, if profits increase 50%, we could estimate the stock price to increase accordingly. So, in 10 years the stock price will probably reach $60 at some point. This adds another 4.1% yearly yield and makes ADM a probably double digit investment over the long term. 

If food prices increase significantly, processing margins improve, there could be exuberant periods like it was the case in 2007, 2014 and 2018.

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The total shareholders equity is $18 billion on a $23 billion market cap giving some margin of safety, but the accumulated depreciation is $15 billion. We could assume that some things can still be used even if the accounting value is zero. The replacing value could be much higher than the $10 billion carried on the balance sheet. 

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Source: ADM Morningstar

There is also the 24.9% stake in Wilmar, a $15 billion company traded in Singapore. The value there is $3.75 billion. 

A few notes from the last conference call

The plan is to save $1 billion from efficiency improvements and digitalization. I remember when I worked for Dow Chemical, there were all these little projects and I can tell you those improved small efficiencies cumulate over time. I see Dow did manage to improve margins over the last decade, the plan is that ADM could save $1 billion.

They expect higher interest payments as they are investing now for the long term, something Bunge can’t do as it has to deal with its issues which makes it another advantage for ADM.

In 2019 they will complete the acquisition of a French animal feed business, Neovia for $1.8 billion in cash. Neovia’s target was to reach $230 million of EBITDA by 2025, perhaps they will reach it sooner now.

ADM is a growth story with more than $7 billion in growth investments over the last five years including key investment like WILD for Taste ($3 billion), Biopolis for Health & Wellness, Neovia for Animal Nutrition, Algar in South America and Chamtor in Western Europe as well as other bolt-on additions and organic investments

My personal opinion

I target an investing business return of 15%. ADM’s average earnings and cash flows point to a 10% investing return so I have to be patient and put this on the watch list. You never know what can happen, but around $30, this might be a very interesting investment. For now, it looks like a good one. 

Also, as ADM’s CEO said, low interest rates allow for high investments that leads to high competition and food oversupply, consequently leading to low margins for processors. ADM is doing fine in this environment, if the environment changes over the next 10 years, ADM might do even better so something to keep in mind. We have been having 5 years now of bumper crops thanks to good weather globally. 

On $3.4 billion in operating profits, $1 billion in capex and about $350 million in interest expense I get to cash flows of around $2 billion. On a $23 billion market cap, that is a 9% return. Given the possible future growth of 4% per year as demand for food grows, I would look at this and compare to my other holdings at 12%. So, ADM’s market cap should be around $16.5 billion for me. That is another 30% down to $30 for the stock price. It is highly unlikely that it ever gets that low, but you never know. Let’s put this on the watch list. If you are happy with the exposure to food, like 10% per year, ADM looks like a stable and shareholder rewarding option. 

Less aggressive investors could wait for opportunities below $40 but anything below $45 seems like a good buy for 98% of investors. 

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Source: ADM investor presentation

Earnings per share are $3.19, we can assume growth of 4% over the long term and a terminal value at a PE ratio of 12.

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If the stock price drops to $30, we would have a 7% return from the stock which would bring this to 11%. 

So, cash flow return is 9%, stock plus dividend return around 7%. Thus, in line almost.

I am analysing the food sector and I must say, ADM looks better than Bunge, also better than Ingredion as it offers more stability thanks to scale. 

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