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  1. Home
  2. / Investing
  3. / Fixed Income

Harvest More Income With This Dividend Aristocrat

Buying Dividend Aristocrats can be a great, long-term play for income investors.
By NICK MCCULLUM
Mar 03, 2019 | 12:00 PM EST
Stocks quotes in this article: ADM

The Dividend Aristocrats are among the best dividend growth stocks in the entire stock market. 
 
To be a Dividend Aristocrat, a list of stocks compiled by Standard & Poor's, a company must be in the S&P 500 Index, and have raised its dividend for at least 25 consecutive years. As a result, investors should think of the Dividend Aristocrats as the "cream of the crop" in the dividend stock universe.
 
Buying the Dividend Aristocrats when they are undervalued can be a recipe for great long-term returns. One of the Dividend Aristocrats that looks cheap today is Archer-Daniels-Midland  ( ADM) . ADM has increased its dividend for over 30 years, and the company has paid its quarterly dividends to shareholders for 87 straight years.
 
ADM's turnaround is gaining momentum. While investors wait for a return to growth, the stock pays a solid yield of 3.3%. ADM is a high-quality dividend growth stock.

Planting Seeds for a Turnaround

Archer-Daniels-Midland is a huge agriculture company, serving 170 countries around the world, with annual revenue of $64 billion. It is one of the world's largest agricultural processors and food ingredient providers.

ADM has four core businesses. Oilseeds is the company's biggest business line, comprising nearly half of the company's total profits. The company is also engaged in origination, carbohydrate solutions, and nutrition.

The past few years have been difficult for ADM. Starting in 2015, prices across a number of agricultural commodities like corn began to fall. The resulting hit to margins weighed on ADM's profitability for several years. The company posted double-digit declines in annual EPS in 2015 and 2016.

Fortunately, the company navigated the downturn by cutting costs to remain profitable. Now that agriculture commodity prices have recovered, ADM's financial performance has improved. The fourth quarter was strong, and 2018 as a whole was even better. For the fourth quarter, EPS increased 7% year-over-year. EPS jumped 44% for 2018, to $3.50.

Now that ADM's strategic investments are gaining traction, the company has returned to strong growth. Investors can expect 2019 to be another year of growth for the company

Harvesting Growth

Archer-Daniels-Midland is capitalizing on improved agricultural commodity prices. But that is not its only growth catalyst. Another of ADM's biggest growth catalysts is acquisitions. The company has made several acquisitions in recent years to expand its product portfolio.

In early 2018, the company announced the formation of a new origination, storage, and destination business in the United Kingdom, called ADM Agriculture Ltd. To form the business, ADM acquired the remaining 50% of its Gleadell Agriculture Ltd. joint venture. The new business entity will help the company cement its leading position in the European market.

Another emerging area of growth for ADM is animal nutrition. In February 2019, the company acquired global animal nutrition company Neovia for $1.8 billion. This deal makes ADM a leader for both production and companion animals. Nutrition has been an increasingly important part of ADM's future growth strategy, and with good reason, as demand for human and animal nutrition products continues to rise.

The company has made a series of expansions and investments in the animal health and nutrition space in recent years, both in the U.S. and the international markets. Specifically, ADM has invested abroad in attractive emerging markets such as China. In recent years, ADM built three specialty animal nutrition plants in China and four plants in the U.S. The company also acquired pet treat manufacturer Crosswind Industries, and expanded its pet food ingredient manufacturing capabilities in North America.

The Power of the Dividend Aristocrats

Research has shown that the Dividend Aristocrats consistently beat the market over time. According to Standard & Poor's, the Dividend Aristocrats produced total annual returns of 15.7% per year over the past 10 years. In the same period, the broader S&P 500 Index generated total annual returns of 14.3% -- meaning the Dividend Aristocrats outperformed the index by 1.4 percentage points per year. The Dividend Aristocrats not only outperformed the broader market over the past decade, they also did so with less volatility.

Archer-Daniels-Midland stock could also outperform the market going forward, as the stock appears undervalued. ADM trades at a trailing P/E ratio of just 12, which is too low of a valuation given the company has returned to growth.

The benefits of investing in high-quality dividend growth stocks, such as the Dividend Aristocrats, and holding on for the long-term are clear. ADM certainly qualifies as a high-quality dividend stock. The company recently increased its dividend by 4.5%, and the stock now offers a 3.3% yield.

Archer-Daniels-Midland stock is undervalued, with a higher dividend yield than the S&P 500 Index and attractive growth potential going forward. These qualities make ADM a top stock pick for long-term dividend growth investors.

Nick McCullum is a regular contributor to Real Money. Click here to get columns like this each day from Jim Cramer, Stephen "Sarge" Guilfoyle, Helene Meisler and Jim "Rev Shark" DePorre.

(This article was originally sent to subscribers of TheStreet's Income Seeker, a product presenting the world of opportunities in fixed income and dividend stocks. Click here to learn more about Income Seeker and to receive articles like this each day from Peter Tchir, Nick McCullum, Chris Versace and others.)

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TAGS: Dividends | Fixed income | Investing | Value Investing | Agriculture | Income Seeker | Real Money | Real Money Pro

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