The world's population is growing and with it the demand for food, livestock feed, alternative fuels and environmentally friendly alternatives to traditional chemicals. As a global leader in the processing of agricultural products, ADM plays a pivotal role in meeting all these needs. ADM has nearly 30,000 employees and manages more than 270 factories worldwide, in which are transformed cereals and the seeds oilseeds in products used in the food industry.
Business Development
In 1902, George A. Archer and John W. Daniels started a flax seed crushing business. Since then, the company has added at least one significant source of profit to its assets every decade. Long known as an agri-food company, ADM has recently invested in fuel production, focusing on bioethanol and biodiesel. If ethanol becomes a significant alternative to gasoline, the company will reap profits from a large portion of its operations.
Anything that increases demand for crops supports business growth:The world population, the consumption of meat, biofuels and plant products. The OECD predicts that demand for crops will increase significantly over the next ten years, even exceeding the peaks of 2008. Much of the demand will come from emerging economies, particularly China, which already represents a significant share of the company's turnover.
The prosperity of emerging countries has led to an increase in demand for food and intensive agriculture. The average Chinese person, for example, consumes twice as much meat today as he did in 1990. Each kilo of meat produced requires between 7 and 16 kilos of cereals, which increases the demand for the products ofArcher-Daniels-Midland. Not only does emerging market growth benefit agricultural production, it also increases overall oil demand, which encourages biofuel production.
The area of arable land worldwide is decreasing. The population boom has halved the amount of arable land per person over the past 50 years. As populations and personal incomes in developing countries increase, global demand for food also increases. The pWorld population has increased by 12% over the past ten years, while agricultural area has increased by only 2%. Brazil, China and India are three of the five most populous countries, trying to meet growing demand for food, fuel and livestock feed. With their populations on the rise, these countries need to make the most of the arable land they have. The reduction in arable land encourages increased yields, which benefits large conglomerates like Archer Daniel Midland.
Archer Daniels Midland reported third-quarter 2011 profit of $578 million, an increase of $321 million (or $157 million) from a year earlier.
Course & dividend
The yield, at 2.3%, is relatively low, but above its long-term average (1.77%). Dividend growth is attractive, at 8.98% per year. Although earnings per share have been growing at a slower pace over the past five years, THE distribution ratio still remains very modest, at 20.13%ADM's dividend shows very appreciable solidity, with 36 consecutive years of increases.
The price currently stands at nine times earnings, proving that the company's valuation is attractive, despite a low yield (which is explained as we have seen by a low distribution of profits).
Although ADM is not very sensitive to market variations, with a beta of 0.28 only, the title displays a relatively significant volatility compared to our portfolio, with 19%. The graph below shows the acyclical and volatile nature of ADM, particularly since 1997.
The title also offers some protection against dollar fluctuations:
Conclusion
Despite undeniable qualities, such as a low distribution ratio and a significant history of successive dividend increases, the expected income is currently still too low compared to the risks incurred. Archer Daniels Midland is therefore a good stock to keep in your portfolio, but not a buying opportunity.
Sources: adm.com, wikinvest.com, yahoo.com, swissquote.ch, dividends.chDiscover more from dividendes
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