In this low-interest-rate environment, investors have turned to high-yielding blue chips for retirement income. This five-part series will outline what we believe are the top five dividend aristocrat stocks, the ones most suitable for a retiree's portfolio.
Our first three articles in our five-part series on dividend aristocrat stocks highlighted the global paper products company Kimberly-Clark (NYSE: KMB), described electrical power solutions giant Emerson Electric (NYSE: EMR) and stated why payroll administrator Automatic Data Processing (Nasdaq: ADP) should be good additions to any retiree's portfolio.
Now we turn your attention to a stock that has rewarded investors with dividends for the past 80 years. This company currently has a 2.2% annual yield, has increased its payout for the past 37 years and has a projected three-year dividend growth rate of 8.1%.
Archer Daniels Midland (NYSE: ADM) fuels North America and its sweet tooth. The agricultural commodity company -- which procures, transports, stores, processes and sells agricultural products -- is one of the largest producers of ethanol and high fructose corn sugar in the U.S. It's also a major processor of oilseeds, especially soybeans, as well as wheat flour, cocoa and cocoa products.
With global demand for foodstuffs increasing at a faster rate than the world's population, Archer Daniels Midland is growing at a steady clip. Over the past five years, the company's revenues increased an average of 19% per year. North America -- one of the world's largest food consuming regions -- is the company's main market; the U.S. currently represents 53% of ADM's total global sales.
The company does best when corn prices are lower rather than higher. Although fluctuations in corn -- used for both ethanol and high-fructose sugar -- and commodity prices have impacted the company's past profit margins, the outlook looks good for 2012. According to the May 2012 World Agricultural Supply and Demand Estimates report, expects excess corn supply could cause corn prices to drop nearly 40% -- from 2011's $6.88 high to a 2012 low of $4.20 per bushel.
Looking forward, ADM could also benefit from a push to increase ethanol blends in gasoline. According to a recent report produced by the WorldWatch Institute, the U.S. Department of Agriculture is recommending the percentage of ethanol blended into gasoline increase from its current maximum of 10.2% to a rate of 15-20%. This increase would greatly expand ADM's ethanol production profits.
Strong Technical Outlook
Shareholders certainly appear bullish on the stock.
As the above chart shows, shares appear to be emerging out of a technical pattern known as a head-and-shoulders formation. This pattern is so named because on the chart it looks like an actual head with a left and right shoulder.
Here's how the formation came about: The stock rose to its October 2011 high of $32.80, then declined to a low near $27.63, forming the left shoulder.
That decline was followed by a push to a higher high at $36.99. That formed the head.
Next, the stock price fell back to $28.33 in May 2011. But soon after, shares rose to $31.69 in July, which formed the right shoulder. But then it fell again.
In technical terms, the head-and-shoulders pattern doesn't become official until shares drop below the so-called support level -- the price below which the stock is unlikely to fall. Once it sinks below that level, a "neckline" is created, which you can see labeled on the chart above. The stock then dropped to a low of $23.29 in late September 2011.
However, since hitting this $23.29 low, shares have been on a strong uptrend, climbing about 37%, so far to date.
The stock is currently near what's known as its resistance level -- the price above which it is unlikely to climb. That is set around the low $33-range. Although resistance has not yet been definitively broken, the more times it is tested, the more likely it is break. In the past three weeks, the stock has attempted to break resistance three times.
In late May, shares pulled back slightly. However, with the next push up, it is likely resistance could be broken. In this case, shares could retest their early 2011 high of $36.99. At current levels, this represents a potential 15% gain and in the meantime investors are paid to wait and collect the yield.
Rising Revenues Ahead
This bullish technical outlook is supported by strong fundamentals. In early May, the company reported solid third-quarter results.
Due to an increase in corn and oilseed processing sales, revenue for the period increased 5.4% to $21.2 million, up from $20.1 million in the prior-year quarter.
For the full 2012 year, analysts' project revenue will increase 9.3% -- from $80.7 billion in 2011 to a projected $88.2 billion in 2012. With continued demand for the company's ethanol-based products, analysts' expect 2013 revenue will increase a further 2.9% to $90.8 billion.
The earnings outlook is similar.
Due to strong performance in its corn processing and agricultural services businesses, the company posted much better-than-expected third-quarter earnings of $0.78 per share, well ahead of analysts' estimates of $0.60 share, but down 12% from the comparable year-ago quarter. The year-over-year earnings drop was largely attributed to weak ethanol margins.
For the full 2012 year, analysts expect earnings will dip 25% to $2.58 per share. (In 2011, it stood at $3.47.) However, as the ethanol supply-demand equation tips back to the company's favor, earnings are expected to pick up again in 2013, increasing at least 22% to $3.17 per share.
In addition to a reasonable growth outlook, the company has a solid price-to-sales ratio -- a metric to value the stock relative to its own past performance -- of 0.24. In comparison, the average for the Farm Products industry is nearly double at 0.50.
In November 2011, Archer Daniels Midland management confirmed its quarterly dividend of $0.175 per share, for a projected forward annual yield of 2.2%. Every year since 2008, the company has increased its total dividend by one cent quarterly, indicating slow, but steady, sustainable growth that investors can likely count on for many more years to come.
The Investing Answer: Although the agricultural processor giant could continue to fall victim to rising commodity costs, which would hurt margins, ADM appears poised to weather any storm. The company is well diversified and caters to fillings one of our most basic human needs -- food supply. With a solid revenue growth outlook and history of dividend increases, ADM seems a suitable investment for a retiree's portfolio.