The FiveTwenty portfolio received no dividends in the past week.
| Past Week Dividend | $0 |
| Current Quarter Dividend | $0 |
| LifeTime Dividend | $0 |
The capital allocation for the week of 01/31/2021 to 02/06/2021 will be used to establish a position in Archer Daniels Midland (NYSE: ADM).
ADM – Company profile
ADM is a global food processing and commodities trading company. The company operates crop procurement facilities, processing plants, and a transportation network to procure, store, clean, and transport agricultural raw materials, as well as products derived from these inputs. It’s products are ingredients used in food products, animal feed, and additives for fuel (ethanol). Official Site | Wikipedia
| Dividend Streak | 46 years |
| Yield | 2.88% |
| Payout Ratio | 40.11%* (GAAP 45.71%) |
| P/E | 13.93* (GAAP 15.88) |
* computed using TTM adjusted EPS of $3.59 as of Q4 2020
Financials
Does ADM have the financial means to sustain and raise its dividend going forward?
Since ADM is a primarily commodity-based business, the reported revenue numbers are heavily impacted by commodity prices. This often leads to wide swings of reported revenue numbers. However, the changes in commodity prices have a proportional impact on the cost of goods sold. Therefore, gross profits are more appropriate metric to evaluate the companies financial performance over time.
Since 2012, the company’s gross profit and net income have seen relatively modest growth. This raises concerns on whether or not ADM will be able to continue growing its dividends payout. On the other hand, the payout ratio in the 40-45% provides the company some flexibility in managing its dividend payout should growth stagnate.
Additionally, ADM has been able to maintain and even slightly improve the net income to gross profit ratio over the last 10 years. More importantly, every time the gross profit has gone up, so has the ratio. We take this as an indication that the company is able to profitably grow its top line. And this in turn bodes well for a continued increase in the dividend.
EPS have been just as volatile as net income. However, ADM has continued increasing its dividend payout year after year, while maintaining a payout ratio of between 20% to 57%. (per GuruFocus)
For 2020 ADM has posted solid financial results. Net income and EPS both grew nicely compared to the previous year, demonstrating the business’s resilience to difficult economic conditions. While COVID-19 posed new challenges to the company’s operations, it did not have a significant impact on its financial performance. Coming off a strong performance in 2020, management is bullish about 2021 and is expecting strong growth once again.
Valuation
Are we paying too much for ADM at the current share price?
In the last 10 years, ADM’s PE ratio (based on GAAP earnings) has seen a low of 7.65 and a high of 22.3, with a median value of 15.18. (per GuruFocus) The current PE ratio of 15.88 (based on GAAP earnings) is very close the the median. Furthermore, the PE ratio based on adjusted earning is 13.93 compares favorably with historic values.
The current stock price of $50.01 is 1.0% below the 50-day moving average and 11.8% above 200-day moving average. The price is also close to the 52-week high of $53.99.
The share price has done quite well since hitting a bottom in March 2020 and is near all time highs. However, on a PE basis it is more or less in line with historical values.
Yield
How does the current dividend yield for ADM compare to historical yields?
Over the last decade, ADM’s yield has been in a range of 1.59% to 4.61%, with a median of 2.72%. (per GuruFocus) The current TTM yield of 2.88%, while no where near to the high yield values seen earlier this year, is still above the median value.
Additionally, ADM announced an increase of the quarterly dividend to $0.37/share from $0.36/share for Q1 2021. The increase pushes the forward looking yield to 2.96%.
Thesis
Why are we adding ADM to the FiveTwenty portfolio?
ADM is a steady recession resilient business. The company is able to chart its own course and is minimally impacted by economic cycles. Furthermore, its scale and geographical reach provide it a competitive advantage in its industry.
We believe ADM is a low risk investment that will continue its history of dividend increases.