ADM: This is an analysis Pollie-Style of Archer-Daniel Midland Company, an existing holding in my Vrijheid Fonds.
As said, I already own this company in my Vrijheid Fonds. Or should I say, I’m a proud owner of (a very small) part of this great company. My frequent readers know that I try to make a new analysis of all my shares every year. It has been a while since I did a comprehensive analysis of ADM.
For my analysis I use a lot of data from the Internet and from the company itself. But most data I get from the famous CCC-list, which was created by David Fish and is now maintained by Justin Law.
This analysis is on Archer-Daniel Midland Company.
Archer-Daniels-Midland Company is a processor of oilseeds, corn, wheat, cocoa, and other agricultural commodities and manufactures protein meal, vegetable oil, corn sweeteners, flour, biodiesel, ethanol, and other value-added food and feed ingredients. The Company’s segments include Oilseeds Processing, Corn Processing, Agricultural Services and Wild Flavors and Specialty Ingredients. The Corn Processing segment is engaged in corn wet milling and dry milling activities. The Agricultural Services segment utilizes its United States grain elevator , global transportation network and port operations to buy, store, clean and transport agricultural commodities, such as oilseeds, corn, wheat, milo, oats, rice and barley, and resells these commodities primarily as food and feed ingredients and as raw materials for the agricultural processing industry. Wild Flavors’ products include flavors, colors, sweeteners and health ingredients, as well as ready-to-market concepts and complete solutions.
Food is Fundamental – It sustains us, fulfills us and fuels our wellbeing
Can I explain this to a 10-year old? What Does This Company Do?
Archer Daniels Midland Company is the company that takes crops from farmers and processes them to make food ingredients. Probably the corn for your breakfast cereals has been processed by ADM
Dividend Aristocrat: ADM is paying Dividend for 45 years in a row! And therefore, it is a Dividend Champion. It is number 53 on the CCC-list form David Fish/Jude Law! That’s a Pass!
Dividend Yield > 2.5%: The dividend Yield of ADM is 3.34%. It’s above the industry average of 2.04%. And it is also above their 5 years average (2.99%). The Yield is above the requirements of the Pollie-Code, and therefore it passes the second Pollie-code.
Dividend payout <70%: The current dividend is $1.44 and ADM has an earnings projection of around $2.76. The dividend payout is roughly 52%. This is below the maximum ratio. This also means that they can keep those dividend increases coming for a long time. Great! That’s what we DGI’s want. So also passed for this point.
DGR 1 year > 0%: The dividend growth rate for 1, 3, 5 en 10 years are 4.5, 5.3, 7.8, and 9.6. With a 3 years DGR of around 5%. It is way above the requirements of the Pollie-code, so it is a pass.
P/E-ratio < 15: This is an easy metric that is well documented. It can be used as a quick metric to identify stocks that may potentially be undervalued. I use this to identify stocks that may be discounted compared to the overall stock market. ADM has a current P/E ratio of 15.6. The industry average is 19.5. The P/E ratio is lower than the industry average and also lower than its 5-years average (15.7). I love well priced Dividend Aristocrats. This metric also passes on the Pollie-code.
EPS > 0: The EPS is 2.76. So, ADM also passed the sixth Pollie-Code
ROE > 10%: Return on equity measures a corporation’s profitability by revealing how much profit a company generates with the money shareholders have invested. The current ROE is 8.1%. This is just not that high and below the requirement of the Pollie-Code. Therefore, it is a fail.
Market Cap. > 100M: No problem at this point. More than 22.130 $Mil. Another pass.
Chowder Rule > 12: Named after “Seeking Alpha” member Chowder. This is a method of identifying candidates for purchase based on a combination of yield and (5-year) dividend growth rate. When the sum of these elements is above 12%, the company presents an attractive entry point (8% for utilities). When the figure is above 8%, an existing holding is still considered worthy of being retained. The current Chowder rule is 11.5. Because ADM is an existing holding ADM also passes the ninth Pollie-code.
Stock price 52wk high-25%: The 52 wk high and low are: 46.35 and 28.62. This means that ADM will be in my buying zone when the stock price is below 41.92 ((46.35-28.62)*0,75 + 28.62). At this moment ADM is trading for $42.89. Great, this is below the requirements and ADM is still in my buying zone. Therefore, it is also a pass on this metric of the Pollie-Code.
Other key figures
Beta: I think it’s important to have low Beta stocks in my portfolio. This helps to have a stable income all the time, even when the market has a rapid decline. The Beta for ADM is 0.95. I like it when the Beta of a stock is below 1.
Debt/Equity ratio: The debt to equity ratio is a simple formula to show how capital has been raised to run the business. As an investor I look at the Debt/Equity-ratio to look how risky it is to invest in that company. The higher the debt to equity ratio, the riskier the investment. The Debt/Equity ratio of ADL is around 0.66. Again, I like what I see here.
Net debt/Ebitda: The net debt to EBITDA ratio is a debt ratio that shows how many years it would take for a company to pay back its debt if net debt and EBITDA are held constant. If a company has more cash than debt, the ratio can be negative. This metric tells something about the health of the company. I like to see ratios below 3 and will be ecstatic with ratios below 1. The Net Debt/EBITDA ratio of ADM is around 4.52.
When I look at the analysis, ADM passed 9 out of 10 from the Pollie-code. The Pollie-code only failed at the ROE.
I see some great figures that I like. With a nice dividend yield and a DGR (3-years) of around 5% it is a great company to own. And I’m still happy with my little part of this company.
However a high Net debt/Ebitda ratio like this sets off my alarm bells because this indicates that a company is less likely to be able to handle its debt burden, and thus is less likely to be able to take on the additional debt required to grow the business. If we take a look at the industry average Net debt/Ebitda (2.69), we see that ADM is above the industry average. And the debt to equity ratio has increased in the last 5 years. All together I find this a little worrying.
And therefore, I am a bit reluctant to expand my position. The undervalue that we are seeing right now, could explain the current undervaluation.
What are you – the readers, thoughts on Archer-Daniels Midland Company? Is it a buy? And what do you think about the high debt to equity ratio of ADM? I like to hear from you!
Please comment on my analysis and thanks for stopping by!
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