Thursday, November 1, 2012

Dividend News: ADM

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.

8 comments:

  1. I was disappointed as well when I saw the announcement. It worried me a bit but I think it's a hold for now to see how the 4th quarter plays out. If it looks like a really poor quarter and that the possible acquisition will hurt the company short term then it might be time to sell. The main reason I feel it's a hold is that until last year their normal dividend increase came with the 1st quarter dividend of each year. Last year they pushed it forward by a quarter to start with the 4th quarter payment. It's payout ratio is still at a safe level so I don't think it's too much of a worry at this time for them.

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    1. Passive Income Pursuit: You make a good point about earlier dividend increases coinciding with the start of the year. ADM is also switching to a calendar-year business schedule. Thus, it is possible we could see a dividend increase in early 2013.

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  2. DGM,

    I've been watching ADM for most of the years. I've been thinking of adding it to my portfolio, but with the freeze in the divi maybe I will wait a little longer.

    Question: I'm familiar with the acquisition news, but not the details. Do you know if this will be a good long term move for ADM or wasted money like many acquisition are?? Might have to do a little research on GrainCorp myself...

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    1. Stoic: Regarding the acquisition, I also know just the basics and not the details, so it is something worth investigating further. It is possible the acquisition will be a good move (I read a favorable comment about it from an S&P analyst), but my main concern is whether ADM is in a suitable financial position to do such a large acquisition (the bid for GrainCorp represents 15% of ADM's market cap). They would probably need to sell off assets (like Gruma) and issue debt or shares to raise the necessary cash.

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  3. PIP has a valid point. You could give it until the next announcement. If it ends up freezing, I'd unload it. The yield is less than 3% plus you have other real concerns on top of it. I don't mind a freeze or two for a high yielder of which ADM is not.

    Or you could just play it safe and cut it loose now. A 5% loss is nothing (you can claim it on your taxes even). There are some appealing choices at the moment such as MCD and KMI as a replacement. I guess it depends on how much you believe in ADM. If they do raise it in Feb., how big do you think it's gonna be?

    Hmm

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    1. Compounding Income: Thanks for your thoughts -- the same ideas crossed my mind. I might just sit and mull this over for a while.

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  4. This isnt a stock I hold, but freezing the dividend is always a signal to take a hard look at your investment, but doesnt mean an automatic sell. I tend to cut companies a little more slack in that department.

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    1. High Yield Soldier: Thanks for your comment. It has indeed made me take a harder look at my investment. I have decided to hold for the time being, but I have not ruled out a possible sale later.

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