The agricultural sector is a compelling place to invest right now for several reasons.
First, it is a very defensive sector given that our need to eat does not change with macroeconomic or geopolitical conditions or technological disruptions. From the beginning of human history to the present, mankind has always needed to eat food, and this demand has only increased with the growth of the human population. Given that we are on the verge of a likely recession, investing in agriculture stocks could serve as a safe haven for your hard-earned capital.
Another reason that agriculture stocks are intriguing right now is the fact that some of the world's largest food exporters -- Ukraine and Russia -- are engaged in a bruising conflict, placing a strain on the global food supply chain. As a result, companies that produce agricultural products could enjoy stronger pricing power than they would otherwise.
Below we will discuss three agricultural dividend stocks with long-term growth potential.
Farming Out Dividends and Growth
Archer-Daniels-Midland (ADM) holds the distinction as being the largest publicly traded farmland product company in the United States. It has three major business lines: cereal grains, oilseeds, and agricultural storage and transportation. It generally purchases its crops from production farms and then provides the transportation, storage, and processing services before turning around and selling them to customers in the food, feed, and energy businesses.
One of ADM's weaknesses is that the products it deals in are commodities and therefore generally lacks pricing power whenever supply is plentiful. Furthermore, its operations are quite capital intensive and its margins are typically very thin, so it is difficult for the company to earn enormous returns on invested capital.
That said, it benefits from enormous economies of scale thanks to its 800 facilities, 59 innovation centers, 317 food and feed processing locations, 453 crop procurement locations, over 41,000 employees, and end markets in over 200 countries. It also benefits from a very strong balance sheet as evidenced by it's A credit rating.
Another competitive advantage for ADM is its specialty sweeteners and starches business and its specialty ingredients products business. These are proprietary products that the company develops by leveraging its superior economies of scale to invest in research and development. As a result, it can charge higher prices for these products and also generally enjoys stickier customer demand.
Its diversified and competitively advantaged business model, strong balance sheet, and prudent long-term focus has enabled it to pay out dividends for 90 consecutive years.
The company aspires to grow earnings per share at a high-single-digit annualized rate through 2025 while deploying 30-40% of its cash flows into capital expenditures at a 10% return on invested capital and another 30-40% of cash flows into dividends. The balance of its cash flows will be used opportunistically, including for share repurchases. Management expects to deploy roughly $5 billion into repurchasing stock by 2025.
When you combine the high-single-digit expected growth rate and the 2.2% dividend yield, ADM is a strong candidate to generate double-digit annualized returns with relatively low risk over the long-term.
Nicest Lawn in the Neighborhood
Scotts Miracle-Gro (SMG) is the leading consumer lawn and gardening company in the United States, offering customers a wide array of products.
Thanks to its strong brand power, SMG is able to charge higher prices and -- when combined with its economies of scale -- generates attractive profit margins on its products. Furthermore, this brand power results in strong customer loyalty as consumers are willing to pay slightly up for products that have proven to reliably deliver positive results.
Furthermore, their scale and brand power have enabled them to capture significant shelf space at Home Depot (HD) and Lowe's (LOW) . This not only serves as a self-perpetuating virtuous cycle of ever-increasing brand power due to their brand being thrust in front of consumers at these popular retailers, but it also serves as a natural growth driver since Home Depot and Lowe's are themselves growing quite rapidly.
When you combine growing volume with SMG's pricing power that enables it to raise prices roughly in-line with inflation each year, the company should generate robust earnings growth for years to come. When combining the high-single-digit to low-double-digit annualized earnings per share growth potential with the attractive current dividend yield of ~3.3%, the total return proposition here is appealing.
Add Some Fertilizer to Your Portfolio
Nutrien Ltd. (NTR) produces agricultural, industrial, and feed nutrients and is one of the world's largest manufacturers of potash, nitrogen, and phosphate. It owns over 1,700 retail locations across Australia and North and South America and supplies over 20% of the world's supply of potash, 3% of its nitrogen, and 3% of its phosphate.
The company is focused on driving long-term growth through its investments in increasing its potash production capacity to 18 million tons by 2025, completing its nitrogen brownfield projects, and growing its Brazilian retail network. The company is also striving to grow its top and bottom lines via an omnichannel strategy of acquiring smaller retail businesses alongside its growing online business. The company's superior scale relative to competitors enables it to invest more aggressively in growing its online business.
On top of those growth initiatives, NTR also aspires to return billions of dollars in capital to shareholders via dividends and share repurchases.
NTR's competitive advantages rest in its low-cost production of potash and nitrogen, enabling it to generate superior returns on invested capital relative to peer producers. Its retail business also benefits from private label offerings as well as offering a generally wider array of products than many of its smaller competitors, giving it an edge in attracting loyal customers.
We expect NTR to generate strong earnings for years to come thanks to the growing demand for high quality fertilizers and its effective omnichannel retail growth strategy.
Bottom Line
With global economic and geopolitical uncertainty at a very high level, safe and attractive income investments are more valuable than ever to investors. Proven and attractively priced dividend paying agricultural plays such as ADM, SMG, and NTR, allow investors to sleep well at night knowing that their portfolios are at least partially hedged against inflation and recession.
