Amid persistent headwinds and fat tails, resilient demand and margins of Archer-Daniels-Midland Company (ADM) could shield retirement portfolios from unforeseen shocks while ensuring steady income generation in a topsy-turvy market.
An expectation-meeting annual inflation rate of 6% for February and recent bank insolvencies could limit the Federal Reserve’s upcoming rate hike to a lower-than-previously-expected 25 bps. However, since the target inflation rate of 2% seems a long way off, the central bank would still be keen to press on, which could trigger Mr. Market into fresh bouts of manic depression.
Moreover, as geopolitical tensions ratchet up over the Pacific and the Black Sea, the global economy seems to be sitting on a tinderbox that could turn forecasts and historical trends on its head. However, since armies can’t march on an empty stomach if it comes to that, ADM could be a safe bet during these troubled times.
ADM operates as an agricultural origination and processing company. It develops sustainable solutions in agriculture, energy, and bio-based alternatives to materials and fuels produced from petroleum products. The company operates through three segments: Ag Services and Oilseeds; Carbohydrate Solutions; and Nutrition.
On February 6, ADM announced the opening of a new production facility in Valencia, Spain, to help meet the rising global demand for probiotics, postbiotics, and other products that support health and well-being. With an investment of $30 million, the company would raise its production capacity more than five-fold to 50 metric tons annually.
The stock has dipped 4% over the past month to close the last trading session at $78.95.
Let’s closely examine the factors that make it worthy of a retirement pick.
Impressive Track Record
Over the past three years, ADM’s revenue has grown at a 16.2% CAGR, while its EBITDA has grown at a 26.9% CAGR.
Over the same time horizon, ADM’s net income and EPS have exhibited 46.7% and 46.7% CAGRs, respectively. Moreover, the company has surpassed consensus EPS estimates in each of those trailing three fiscals.
ADM’s total assets have also grown at a 10.8% CAGR over the past three years.
Outstanding Recent Performance
For the fourth quarter of the fiscal year that ended December 31, 2022, ADM’s revenue increased 13.6% year-over-year to $26.23 billion. The company’s gross profit increased 6.8% to $1.76 billion during the same period. As a result, its adjusted net earnings for the quarter increased 25.8% and 28.7% year-over-year to $1.07 billion and $1.93 per share, respectively.
The strong quarter capped an outstanding fiscal year for ADM, which saw its revenue increase by 19.5% year-over-year to $101.85 billion. This was driven by Nutrition revenue growth that continues to outpace the industry and Carbohydrates Solutions results, including 26% year-over-year revenue growth in BioSolutions. The company’s gross profit for the fiscal year increased 26.4% year-over-year to $7.57 billion.
As a result, ADM’s adjusted net earnings for the fiscal year increased 50.6% and 51.3% year-over-year to $4.42 billion and $7.85 per share, respectively.
Consistent and Increasing Return of Capital
During the fiscal year 2022, ADM generated $5.3 billion in cash from operations before working capital. This enabled the company to return $2.3 billion to shareholders in the form of dividends and share repurchases, with the latter, also helping the company to report a greater percentage increase in EPS compared to its adjusted net earnings for the concerned period.
On January 26, ADM announced a 12.5% increase in its quarterly dividend payout to $0.45 per share. This represented the company’s 50th consecutive year of dividend increase.
The first installment of the revised quarterly dividend was paid out on March 2, marking ADM’s 365th consecutive quarterly payment. The company has paid dividends uninterruptedly for 91 years. The company pays $1.80 annually as dividends. This translates to a yield of 2.28% at the current price, compared to its 4-year average dividend yield of 2.69%.
ADM’s dividend payouts have increased at a 5% CAGR over the past five years.
Positive Outlook
The fiscal year 2022 has been bountiful for grain-trading middlemen, such as ADM, and the broader U.S. agriculture sector, due to shortages perpetuated by adverse weather conditions in certain parts of the world and Russia’s war in Ukraine, one of the world’s top grain-exporting countries. However, despite elevated crop prices, demand is expected to remain strong in 2023 due to the reopening of the Chinese economy.
For the fiscal year 2023, ADM’s revenue and EPS are expected to come in at $101.48 billion and $6.93, indicating 19% and 33.5% increases over its 2021 levels, respectively.
ADM has also impressed by surpassing consensus EPS estimates in each of the trailing four quarters.
POWR Ratings Reflect Robustness
ADM’s solid fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which equates to a Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. ADM has a B grade for Growth and Sentiment, consistent with its impressive track record and favorable analyst estimates.
ADM ranks #5 of 26 stocks in the Agriculture industry.
Click here to see the additional POWR Ratings for ADM’s Stability, Value, Momentum, and Quality.
Bottom Line
Given its strong fundamentals, stable prospects, and impressive track record of consistent return of capital to shareholders, ADM could be a reliable source of adequate risk-adjusted returns for the long term.
How Does Archer-Daniels-Midland Company (ADM) Stack up Against Its Peers?
While ADM has an overall POWR Rating of B, which equates to a Buy, investors could also consider looking at its A-rated (Strong Buy) or B-rated (Buy) industry peers: AGCO Corporation (AGCO), ICL Group Ltd (ICL), and Golden Agri-Resources Ltd (GARPY).
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ADM shares were trading at $76.71 per share on Wednesday morning, down $2.24 (-2.84%). Year-to-date, ADM has declined -16.93%, versus a 0.83% rise in the benchmark S&P 500 index during the same period.
About the Author: Santanu Roy
Having been fascinated by the traditional and evolving factors that affect investment decisions, Santanu decided to pursue a career as an investment analyst. Prior to his switch to investment research, he was a process associate at Cognizant. With a master's degree in business administration and a fundamental approach to analyzing businesses, he aims to help retail investors identify the best long-term investment opportunities.
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