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How Safe Is Archer Daniels Midland's Dividend?

By Maxx Chatsko - Sep 7, 2017 at 10:35AM

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The agricultural products leader has struggled in 2017. Could anything threaten its commitment to paying dividends?

Archer Daniels Midland (ADM -0.52%), a global agricultural raw materials processor and logistics company, has paid 343 consecutive dividends spanning a period of 85 years. That impressive timeline includes bull markets and bear markets, as well as various challenging and advantageous circumstances. The company's amazing ability to generate cash flows supports its long history of creating shareholder value, which means shareholders should probably continue receiving a dividend each quarter. 

However, global agriculture is rife with headwinds at the moment. American farmers are swimming in excess corn, while ethanol producers -- including Archer Daniels Midland, the world's largest -- have suffered from a glut of industrial alcohol in 2017. Meanwhile, South American harvests have continued their irregular timing due to droughts and farmer decisions to delay grain sales.

The company has already suffered from these headwinds. Operating cash flow dropped from $5.2 billion in 2013 to just $1.5 billion last year, a drop of 72%. Knowing that, investors may be right to wonder: How safe is Archer Daniels Midland's dividend? 

A hand placing an egg carefully into an egg carton.

Image source: Getty Images.

By the numbers

The company has done its best in the face of volatile commodity markets in recent years. A precipitous fall in revenue has been managed through a long-term plan to improve margins, supported by three initiatives:

  1. A focus on more efficient operations.
  2. Investments in high-value specialty ingredients.
  3. Divestitures of noncore assets. 

So far so good.

ADM Revenue (TTM) Chart

ADM Revenue (TTM) data by YCharts.

Although the long-term plan to boost margins initially struggled with a fall in operating cash flow, management's strategy has begun showing signs of a big payoff. Trailing-12-month operating cash flow has doubled in the last six months alone. In fact, first-half 2017 operating cash flow nearly exceeded the total from all of 2016.

ADM Cash from Operations (TTM) Chart

ADM Cash from Operations (TTM) data by YCharts.

Perhaps the loudest metric demonstrating management's confidence in the strength and long-term trajectory of the business is the amount of cash flow devoted to directly creating shareholder value. Since the end of 2013, Archer Daniels Midland has spent $4.7 billion gobbling up 96 million shares of common stock, reducing the share count 15% in the process. Another $2.4 billion has been spent on dividend payments in that period. 

The result: there are fewer shares outstanding laying claim to the company's dividend payout:

ADM Shares Outstanding Chart

ADM Shares Outstanding data by YCharts.

Given that significantly more cash is devoted to share repurchases than to dividend payments today, it would be relatively simple to stop the former to keep the latter humming along. Therefore, shareholders should be confident that the dividend will be at least maintained -- even in the worst potential markets.

What does it mean for investors?

Although Archer Daniels Midland stock has struggled to keep pace with the S&P 500 in the last five years, the company is on solid footing for both the short and long term. Management has pulled all the right levers to manage the factors within its control. Better yet, many of the moves are only just beginning to pay off.

The overnight diversification into high-value specialty ingredients -- which only began in late 2013 with the acquisition of Wild Flavors -- remains one of the strongest moves made by the company. It created a new segment that contributed 13% of total operating profits in the first half of this year. More importantly, the segment promises to not only continue growing, but to provide a lifeline when the going gets rough in the highly cyclical commodity-based agricultural products industry. 

Long story short, this cash cow's dividend, which yields 3% and pays shareholders $1.28 per share each year, is remarkably safe. Archer Daniels Midland remains a blue chip dividend stock for any income investor.

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