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Archer Daniels Midland Is a Smart Dividend Buy

By Dan Caplinger - Apr 6, 2013 at 2:05PM

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ADM is on the elite list of Dividend Aristocrats. Here's how it got there.

Investors have always been interested in stocks that pay dividends, but lately, low interest rates on bonds and other fixed-income investments have made solid dividend payers even more valuable. Among the most promising dividend stocks in the market is Archer Daniels Midland (ADM 1.15%), and one big reason is that it's one of the few exclusive companies to make the list of Dividend Aristocrats. To become a member of this elite group, a company must have raised its dividend payouts to shareholders every single year for at least a quarter-century. Only a few dozen stocks manage to make the cut, and those that do tend to stay there for a long time.

When it comes to the agricultural industry, Archer Daniels Midland is a giant, with operations throughout the food chain. From collecting and transporting crops to processing food products and animal feed as well as biodiesel and ethanol, ADM has a fully vertically integrated agricultural operation. With so much interest in the ag industry having come from high crop prices, the company has both had opportunities to profit and faced challenges to its growth. Let's take a closer look at Archer Daniels Midland to see whether it can sustain its long streak of rewarding dividend payouts to investors.

Dividend Stats on Archer Daniels Midland

Current Quarterly Dividend Per Share

$0.19

Current Yield

2.3%

Number of Consecutive Years With Dividend Increases

38 years

Payout Ratio

34%

Last Increase

February 2013

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

Has Archer Daniels Midland grown or wilted lately?
Even with generally favorable conditions in the agricultural markets, ADM has had its share of troubles lately. Last year's drought crushed its agricultural service segment last year, seeing a 75% drop in profits as its grain elevators operated well below capacity because of heat-stricken farms that produced far less in crop yields than during normal years. Although improvement is seen coming this year for much of the Midwest and Great Plains, ongoing drought conditions could continue to pressure ADM.

Source: U.S. Seasonal Drought Outlook, National Weather Service.

ADM's renewable-fuel business grabs most of the attention from investors. The drought has also had a big impact in this segment as well, as ADM has had to idle ethanol production facilities because of low corn supplies following the drought. Moreover, with sugar-based ethanol competitors Bunge (BG 0.23%) and Cosan (CZZ) already benefiting from pricing disparities between sugar and corn, prospects of potential tariffs on U.S. ethanol in Europe could give Brazilian sugar-based ethanol a competitive advantage, further hurting ADM.

ADM Dividend Chart

Archer Daniels Midland Dividend data by YCharts.

Yet as you can see, none of these challenges has hurt ADM's ability to pay sizable dividends. In fact, the company just raised its payout in February, with a 9% jump in its quarterly dividend.

ADM has sought to grow by reaching out to industry peers. It allowed Solazyme (TVIA) to use an Iowa plant to produce its renewable algal oils, which helped Solazyme boost its overall production to achieve commercial-scale levels. Meanwhile, ADM's ongoing attempt to buy the remaining 80% of Australia's GrainCorp that it doesn't already own has met with resistance, as the Australian exporter has so far rebuffed a sweetened bid for the company. Whether those moves will pay off for ADM in the long run remains to be seen.

When will dividends rise again?
With ADM just having boosted its payout, investors shouldn't expect another dividend increase until 2014. But with the company having been able to produce a nice increase even in tough times, the potential for even larger gains under better conditions should help ADM's future prospects.

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Stocks Mentioned

Archer-Daniels-Midland Company Stock Quote
Archer-Daniels-Midland Company
ADM
$88.77 (1.15%) $1.01
TerraVia Holdings, Inc. Stock Quote
TerraVia Holdings, Inc.
TVIA
Bunge Limited Stock Quote
Bunge Limited
BG
$115.73 (0.23%) $0.27
Cosan Limited Stock Quote
Cosan Limited
CZZ

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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