Dividend Aristocrats: Time to Buy Archer Daniels Midland?

Source: Archer Daniels Midland.

Many stocks that pay healthy dividends rely on industries without which the world wouldn't work as efficiently. Archer Daniels Midland (ADM -0.91%) is a great example of such a company, as it serves to connect the farmers and ranchers that produce crops and meat with the end users who need those goods as food. ADM also has a thriving business processing and transforming various farm products into sources of energy and other industrial staples. One other thing that Archer Daniels Midland has going for it is that it's a member of the Dividend Aristocrats, having a record of raising its dividends each year for at least 25 years.

Archer Daniels Midland has a global reach, with its processing plants helping the company facilitate the movement of essential goods to markets in more than 140 countries. But ADM is still looking at building up its business, and recent strategic acquisitions have aimed ADM in the direction of further growth in some key market niches. Below, we'll take a closer look.

Dividend Stats on Archer Daniels Midland

Source: Yahoo! Finance. Last increase refers to ex-dividend date.

Agriculture looks strong for Archer Daniels Midland

The agricultural industry has been strong for years, as high crop prices have left farmers relatively flush with cash compared to tough times in previous decades. Higher prices force ADM to pay more for its raw materials, but the company can then pass through higher ingredient costs to its end users, avoiding a potential margin squeeze.

Archer Daniels Midland has also remained a major player in the ethanol industry. With so much controversy about whether ethanol is really the best path forward for sustainable energy, ADM has thrived from fuel standards that have called for higher ethanol blends over time. Yet as those standards have come under criticism, ADM remains exposed, even as it diversifies into biodiesel and other forms of renewable fuels.

Despite some of those concerns, the company's business has remained relatively stable, and Archer Daniels Midland has been able to put together almost four decades of consecutive dividend increases. ADM's yield is far from the highest in the market, but the company also pays out a small portion of its overall earnings, leaving itself in a strong position to direct its capital for other uses as they arise.

ADM Dividend data by YCharts.

Archer Daniels Midland is still vulnerable to the whims of the commodities markets. Cocoa has been a tough area for ADM, as the company has struggled to make money, despite having a dominant position in providing processing capacity for the industry. More broadly, much of ADM's business still comes from delivering raw crops and other products where they're needed. That low-margin revenue can be volatile from a profit standpoint as commodities-market prices fluctuate.

Building up Archer Daniels Midland's high-margin businesses

To try to move beyond commodities, ADM has moved aggressively toward making a stronger splash in the flavoring industry, with its recent purchase of WILD Flavors helping to bolster its existing portfolio. Proponents of the combination believe that WILD Flavors' emphasis on beverages will help Archer Daniels Midland fill out its food-focused ingredient portfolio, and that WILD's particular ingredients will put ADM more in line with trends toward wellness and healthy products. Lower costs and cross-selling opportunities from the combination could help the deal pay for itself in the long run.

Source: Archer Daniels Midland.

WILD Flavors' European presence is just one way in which ADM is looking abroad for growth. Archer Daniels Midland owns the largest biodiesel production facility in Brazil, as well as plants for processing soybeans and cocoa and facilities to blend fertilizer. As Brazil's populace sees its standard of living rise, ADM hopes that it will be able to serve more of their needs in the long run, and get itself on the ground floor of the nation's emerging-market opportunity.

Why ADM's dividend could grow even faster

With ADM paying out just more than a third of its earnings, investors don't need to worry about the potential for its streak of dividend increases to come to an end anytime soon. The company still faces plenty of challenges, but with the right long-term strategic vision, Archer Daniels Midland is well positioned to stay in its leadership role in agriculture.