My selection for a stock trading at less than $20 per share that has considerable long-term growth potential is Farmland Partners (FPI 4.40%). This company is organized as a real estate investment trust (REIT) and focuses on -- you guessed it -- farmland, specifically in the United States. On Friday, its stock closed at $14.11.
Farmland Partners is one of only two publicly traded farmland REITs. Gladstone Land is the other one.
Before we dive in, a word of caution: While it's possible to find some relatively undiscovered gems among lower-priced stocks, as a whole this space tends to be quite risky.
Image source: Getty Images.
Why invest in REITs?
Real estate investment trusts are attractive because they tend to pay solid dividends. In exchange for the special tax treatment they receive, they're required to pay out at least 90% of their annual income as dividends.
Farmland Partners' dividend is currently yielding about 1.7%. This is on the low side for REITs, but the stock could be a nice fit for investors more concerned with long-term capital appreciation than current income.
Why invest in U.S. farmland?
Prime U.S. farmland is poised to increase nicely in value over the long term, in my view, because of supply demand dynamics.
The supply of arable land should shrink over time due to continuing development and climate change, which is causing an increase in the frequency of severe droughts in this country and around the world. On the other hand, demand for crops grown on farmland should continue to grow. The world's population is rising and more people in developing countries are moving into the middle class.
Moreover, the pandemic and the Russian invasion of Ukraine have underscored the benefits of companies (and entire countries) having domestic supply chains. This is especially true with respect to supply chains for essential goods and commodities, such as food.
The current high-inflationary environment is another reason why now is a good time to consider investing in farmland, which investors can do by buying shares in a farmland REIT. Investments in physical assets tend to outperform those in other categories when inflation is high.
Farmland Partners' business and key stats
Farmland Partners, which went public in 2014, buys high-quality U.S. farmland that it leases to farmers to grow a variety of crops. It also provides auction, brokerage, and third-party farm management services.
The company's portfolio included about 160,700 acres of owned farmland and 25,000 acres of managed farmland across 19 states, as of the end of the first quarter. With more than 100 tenants and 26 crop types grown on its farms, the company has good geographic, tenant, and crop diversity. Portfolio vacancy was 0%.
| Company | Market Cap | Dividend Yield | Forward Price/AFFO* Based on Company's 2022 Guidance | Stock's Year-to-Date 2022 Total Return | Stock's 5-Year Total Return |
|---|---|---|---|---|---|
| Farmland Partners | $706 million | 1.7% | 50 to 64** | 18.5% | 83.8% |
| S&P 500 Index | -- | 1.59% | -- | (22.3) | 65.2% |
Data sources: Yahoo! Finance and YCharts. Data as of June 17, 2022. *AFFO = adjusted funds from operations (FFO). FFO is akin to "earnings" for REITs; it's the primary driver of payouts to shareholders, and adds such items as depreciation and amortization back to net income. **Calculated by author.
Last month, the company announced that it was raising its quarterly dividend by 20% to $0.06. CEO Paul Pittman attributed the increase to "strong earnings growth, significant asset appreciation, reduced [debt] leverage, and better expense visibility resulting from the dismissal of the class action litigation."
This dividend hike is the first one since 2018. The 20% raise suggests management feels very confident about the company's future profitability performance.
Farmland Partners stock is trading at 50 to 64 times the 2022 AFFO range for which management has guided. This is a relatively high valuation, but attractive stocks rarely come cheap.
Lastly, investors can expect some cyclicality with a farmland REIT because there is cyclicality with agricultural commodity prices, which are currently at or near all-time highs. However, the long-term trend will be up for these commodities for the supply demand reasons discussed, in my opinion. If this thesis proves accurate, Farmland Partners stock should be a long-term winner.
