The Dividend Aristocrats are a select group of currently 57 S&P 500 stocks with 25+ years of consecutive dividend increases. These 57 are large, US companies that have historically provided (slightly) better performance and (slightly) lower volatility than the S&P 500 as a whole.
S&P 500 applies the following criteria to construct the Dividend Aristocrats list:
- must be members of the S&P 500
- must have increased dividends every year for at least 25 consecutive years
- Market Cap at least USD 3 billion
- Liquidity at least USD 5 million (average daily value traded)
- Diversification, at least 40 constituents and no sector allocation above 30%
There are currently 66 Dividend Aristocrats. You can download an Excel spreadsheet of all 66 (with metrics) for FREE by joining our newsletter:
This “in focus article” will discuss several aspects of the dividend aristocrat Archer-Daniels-Midland Company (ADM) and why the stock could be attractive for income investors based on our Dividend Score. Our Dividend Score System takes into account several fundamental and technical metrics that affect a company’s ability to continue paying dividends and its overall return.
Archer-Daniels-Midland (ADM) overview
|Dividend||Dividend Yield||DGR 3 years|
Data: December 9th, 2019
Business model and growth perspective
Archer-Daniels-Midland Company, founded 1898, procures, transports, stores, processes, and merchandises agricultural commodities, products, and ingredients in the United States and internationally. ADM is a world leader in the production of soy meal and oil, corn for ethanol and sweeteners as well as, wheat for bakery products. The company also makes such value-added products as specialty food ingredients and specialty feed ingredients.
Source: ADM Investors presentation
According to ADM, they have the following key competitive advantages:
- Global footprint
- Diversification (e.g. product mix)
- Operations (integrated ops)
- Risk-Management Focus (hedging)
Investors should be aware that , ADM’s earnings and cash flow are driven by (macro) factors largely out of its own control, such as the weather, commodity prices, shifting consumer food preferences, and government agricultural policies. This is also resulting in a volatile earnings trend as displayed in the chart below.
Dividend history and dividend growth
It is important that companies that can maintain or even increase their dividend payments in bad times. This is an indication that the company has a strong market position in a stable business that performs well throughout the economic cycle.
ADM has raised its dividend already for 44 consecutive years. Archer-Daniels-Midland’s has never been a high-growth stock, but the company increased its dividend very consistently in the past with an annual dividend growth rate of around 4-6%.
Archer Daniels Midland declared a quarterly dividend of $0.35/share. The last dividend increase of 4.5% was in February 2019, from a prior dividend of $0.335.
Archer-Daniels-Midland Co’s current dividend yield of 3.15% is 13% above its 5-year average. The 5-year average dividend yield is 2.80% (see red-line in the chart). This indicates the stock may be undervalued today.
The dividend payments are reasonably covered by its earnings, given the current payout ratio of 51%. According to analysts, ADM’s payout ratio over the next year is expected to be 45%. ADM is aiming for 30%-40% medium-term.
Stable cash flow
Without stable cash flow, it is almost impossible to maintain the dividend in times of a downturn. Operating free cash flow and free cash flow are 2 important metrics for a dividend stock. ADM has generated positive free cash flow in just 6 of the last 10 years, which is a confirmation that ADM’s business has been volatile and (probably) depends on a number of factors outside of the company’s control.
Low debt ratio
Companies with a low debt ratio have the option of maintaining or even increasing the dividend even during recessions. The (net) debt-to-EBITDA ratio is a great metric to include. ADM’s net debt-to-EBITDA ratio is at a very healthy level of 2.51 (the lower, the better). Net debt/EBITDA ratio values below 3.0 are still acceptable.
ADM’s forward P/E ratio of 14.1 is also about in line with its 5-year average of 14.3. Indeed, the market appears to be valuing the stock similarly to how it has in the past, suggesting that ADM could be fairly priced. Based on the 5-year average dividend yield method, the stock may be undervalued today.
The company’s adjusted earnings-per-share trend during the Recession period (2007-2009) can be seen below:
- 2007 adjusted earnings-per-share of $2.38
- 2008 adjusted earnings-per-share of $2.84 (19% increase)
- 2009 adjusted earnings-per-share of $3.06 (7.7% increase)
- 2010 adjusted earnings-per-share of $3.06
Archer-Daniels-Midland’s adjusted earnings-per-share continued to rise through the financial recession. This is because the company’s performance is much more reliant on commodity prices than economic activity.
The company’s share price declined noticeably during this time period, as shown below. Archer-Daniels-Midland’s stock fluctuated from a high of $48.18 to a low of $15.29 during the calendar years 2007-2009. The ADM stock price from 2007-2009 can be seen below, including the 200-days moving average.
Year-to-date ADM is trading up 11.4%, which is below the S&P 500 performance.
The 10-year geometric annual performance is 4.4% annually. Looking at the win-ratio of 82% and a loss ratio of 3.1, those two values are average for this stock.
ADM’s performance triangle.
Archer Daniels Midland offers modest growth prospects, but shareholders ultimately need to be aware that earnings growth depends on a number of factors outside of the company’s control. Investors get an above-average dividend yield (3+%). The stock is currently slightly undervalued, but we do not consider this company as a buy for risk-averse dividend investors.
Other Sources of Dividend Investment Ideas
The Dividend Aristocrats list is not the only way to quickly screen for businesses that regularly pay rising dividends.
- The Dividend Kings List is even more exclusive than the Dividend Aristocrats. It is comprised of less than 20 businesses with 50+ years of consecutive dividend increases.
- The MoneyInvestExpert Defensive Aristocrats is a performance-based top-10 selection of the Dividend Aristocrats to outperform the market on the long-term.
- Portfolio lists like the Berkshire Hathaway Portfolio or Bill Gates’stock portfolio can be a source.
- For the European focused investors there is also the list of European Dividend Aristocrats.
- Dividend Champions are not necessarily members of the S&P 500 index, have increased their dividend for 25 or more consecutive years.
- 100+ years of dividend, the list of stocks that pay over 100 year of dividend can be an list of inspiration.
Next to selecting the right dividend stocks, important principles for successful long-term investing are Disciple, Diversification, Defensive & indeed Dividend. Read more about this in our free e-book.
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