Certain sectors of the market lend themselves to creating great dividend stocks. That could be because demand is steady, margins are high, or the sector is experiencing a lot of growth. Examples include utilities, consumer staples companies, and agriculture stocks, three of which we'll review here.
Great Scotts! (Miracle-Gro)
Founded in 1868, Scotts Miracle-Gro (SMG) is a manufacturer and distributor of various lawn and garden care products, as well as indoor and outdoor planting products globally. Scotts has three segments: U.S. Consumer, Hawthorne and other. Through these segments, Scotts provides a huge variety of products such as its famous lawn and grass care lines, fertilizers, weed control, pest control, plant food, and certain hardware that relates closely to its core products, such as spreaders. Scotts owns many of the most recognizable brands in the space, including Earthgro, Ortho, Miracle-Gro, Roundup, and of course, Scotts.
The company should generate about $4 billion in total revenue this year, and trades with a market cap of $2.8 billion following a very large selloff so far in 2022.
Scotts has built an enviable portfolio of consumable agricultural products that generally see higher demand over time. This is true for the company's consumer-facing portfolio of lawn care products, but in addition to that, Scotts has a variety of products for growers that demand ever-higher yields from their crops. The massive tailwind Scotts saw from cannabis growers in the past couple of years has abated, and we think the much lower earnings base for this year can afford the company robust 7% earnings-per-share growth going forward.
Scotts has also managed to boost its dividend for 12 consecutive years, which is quite good in a sector that is as cyclical as agriculture products. Moreover, the average dividend increase from the past decade has been about 8%, so the company is serious about returning cash to shareholders. The payout ratio, despite all of this growth, is still just over half of earnings, and given the 7% earnings growth we're forecasting, we see many more years of dividend increases ahead for Scotts.
The dividend yield is now up to 5.2%, which is about triple that of the S&P 500, and a yield that is normally reserved for real estate stocks. With the yield being as high as it is, as well as the relative safety of the payout, we see Scotts as a tremendous dividend stock today.
The stock is also trading at just 11-times this year's earnings estimate, which is meaningfully below our fair value estimate of 15-times earnings. That could provide a mid-single digit tailwind to shareholders in the coming years from a rising valuation. With all of these factors combined, we see more than 16% total annual returns in the years ahead for Scotts.
Up And ADM!
Founder 120 years ago, Archer-Daniels-Midland (ADM) is a commodities giant that procures, transports, stores, processes, and distributes agricultural products worldwide. It has three segments: Ag Services and Oilseeds, Carbohydrate Solutions, and Nutrition. Through these segments, Archer produces, stores, moves and distributes a huge variety of agricultural commodities, including corn, wheat, oats, barley, oilseeds, sweeteners, vegetable oils, animal feeds, and much more.
The company should produce about $98 billion in revenue this year, and has a current market cap of $48 billion.
Archer has enjoyed growing demand over the years, thanks to its immense size and scale. The company is a dominant player in the agricultural commodities business in the U.S., and given demand for food-related commodities in particular, we see the company's business model as quite attractive for producing dividends over time. That has helped the company raise its dividend for a whopping 47 years consecutively, putting it in rare company not only among agriculture stocks, but any sector in the market. Further, the company's average increase in the past decade is approaching 9%, which means Archer scores high marks on both longevity and growth.
We see 5% earnings growth going forward, and the current payout ratio is just one-quarter of this year's earnings, meaning Archer's dividend is extremely safe, but also has a very long runway for future growth ahead of it. The current yield is just 1.9%, but that's still about 30-basis points ahead of the S&P 500, and Archer has much better dividend growth prospects than the broader market.
We estimate fair value at 14-times earnings, and shares are just under 13 times today, indicating a modest tailwind from the valuation. In conjunction with 5% earnings growth and the 1.9% yield, we project 8%+ total returns in the years to come.
Our final stock is Bunge Limited (BG) , which operates as an agricultural and food company worldwide. The company has four segments: Agribusiness, Refined and Specialty Oils, Milling, and Sugar and Bioenergy. Through these segments the company provides a wide variety of products, including oilseeds, grains, protein meals, bulk oils and fats, flours, corn meal, and more.
The company was founded in 1818, and in the two centuries since its founding it has grown to about $69 billion in annual revenue, and a market cap of $13.6 billion.
Like Archer, Bunge's highly diversified agricultural commodities business lends itself to consistency. Bunge has a long list of commodities in its portfolio that cover a wide variety of uses, and over time, demand for these commodities continues to grow. There are periods of cyclicality, of course, but we believe the company's dividend prospects are bright.
The current dividend increase streak is just two years, but that's because Bunge paused its dividend raises during the pandemic. There was never a cut, but it did go one year without an increase. Still, the past decade has seen an average growth rate of 9% annually in the dividend despite this pause, so Bunge is regarded as a strong dividend growth stock despite its modest streak.
Bunge's current earnings are elevated by historical standards, so we see slight earnings contraction in the years ahead. However, earnings-per-share rose from $1.75 in 2019 to $13.64 last year, so the extremely high base means slight contraction is far from problematic.
That also means the payout ratio is just 21% on this year's earnings, so we see the dividend as very safe, and with a lot of room for future growth. The current yield is respectable at 2.8% as well, so it's a well-rounded dividend stock.
We see fair value at 10.5-times earnings, and today, shares trade for just over 7-times. That could create a sizable tailwind, and in concert with earnings contraction and the yield, we expect about 8% total annual returns in the years to come.