Archer Daniels Midland (ADM) is not increasing its dividend this year. Today the company announced its fifth consecutive quarterly dividend of $0.175 per share. I am rather disappointed by this news.
I am aware that ADM's earnings were hurt this year due to the drought, so their financial position is not strong at the moment. Despite this weakness, just last week it was disclosed that ADM had built a 14.9% stake in Australian-based GrainCorp and has bid $2.76B to acquire the entire company. Given ADM's financial position, I seriously question whether such a large acquisition attempt is a prudent action at this time. The company has raised a bit of cash through a tentative deal to sell their stake in Gruma SAB, a Mexican company that manufactures corn flour and tortillas. Presumably, the lack of dividend increase is also designed to conserve cash for the potential acquisition of GrainCorp.
The lack of a dividend increase and the questionable acquisition attempt, along with the earnings volatility, are making me rethink my investment in ADM. When I bought the stock back in January, it seemed to be very undervalued, with a P/E of 8.57, P/S of 0.23, P/B of 1.06, and PEG of 1.17. I even remember seeing a F.A.S.T. Graph that showed the extent of the undervaluation. However, whatever margin of safety I had was completed eroded by the earnings collapse, such that my total return since January is -4.9%. It is not a big loss, but I question whether the potential future return from ADM outweighs the overall risk (of capital loss and lack of dividend growth).
In a post earlier this year I outlined some conditions under which I would consider selling a stock. Three of the conditions included the dividend being frozen, the company's fundamentals deteriorating, and the company making a change such as a major acquisition. Given that ADM meets multiple conditions, I will be giving serious consideration as to whether it should remain in my portfolio. Of course, there is always the possibility that I am overreacting to recent events, so I welcome any thoughts from readers.