Friday, November 20, 2015

Recent Purchase (Tax Deferred) - ADM



After transferring some of my mutual funds over to my 401k self directed account, I initiated my first trade. I bought 100 shares of ADM. Since the the account is new, the interface is not familiar, it was a learning experience as well. Fortunately, no hiccups.


Details of transaction:


Action
Security
Price
Quantity
Amount
Buy
ADM
$37.00
100
$3700 +fees


The yield is close to 3.10% which increases my forward yearly dividends by $112.00.


My plan for the 401k self directed account is just to let my investments sit there for a long time. I am leaning towards stable companies with a long history of dividend growth, stability and ability to grow earnings. ADM seems to fit this criteria quite well. I also have some REITs to load up due to the advantages of tax deferral. Like my taxable account, I plan only one trade once per 1 or 2 weeks.



About  Archer Daniels Midland Co. (ADM)


You can read more about ADM here:
http://www.wikinvest.com/stock/Archer-Daniels-Midland_(ADM)




Criteria Table


I’ve updated my criteria table from my last transaction earlier in the month. There was a slight bug in my spreadsheet last week.


ADM 11/2015
Area
Criteria
CheckList
Comment
Quality Company
Dividend Growth
>5 years
Yes
40 Years
ROE/Op Margin
Stable
Yes
Stable
Long term Avg Growth
Stable
Yes
Stable - Note
FCF over Dividends
Yes
Yes
FCF covers Dividends
M* Moat
Wide Moat
No
M* None (Thanks Jason for the correction!)
M* & S&P
Credit Rating
> BBB+
Yes
BBB+
Cash to Debt & Interest Coverage, Debt to Equity
Cash Debt >1 or Interest Coverage > 5
Yes
Cash to Debt 0.17
Interest Coverage 8.49
Debt to Equity 37.94
M* & S&P Stars
> 3 Stars for both
Yes
M* 4 Stars
S&P CapIQ 3 Stars
Payout Ratio
<60%
Yes
37%
Dividend Growth
& Yield
Dividend Yield
>3%
Yes
3.11%
Dividend Growth
>5%
Yes
11.40%
Chowder
>8%
Yes
14.51%
Valuation
Yield/Avg Yield
>1.1
Yes
1.35
Dividend Yield Theory Mid Point
Below Mid Point
Yes
Mid Point 56.
Low Point 37
P/E
Below Mid Point
Yes
Median 15.34 Current 12.59
DRRM
~10%
No - but for ADM - 8+% okay
Assuming 6% growth; projected return=9.13%
M* Estimate
<M* est
Yes
M* 49
S&P Estimate
< S&P cap IQ est
Yes
S&P Cap IQ 45
Note: Data from Gurufocus, Google Finance, Yahoo Finance, M*


Fair Price Calculation


I use the dividend yield theory, PE analysis and DDRM for fair price calculation. Based on these methods, I estimate the fair price to be around $43-45. Therefore, I believe ADM is trading close to or just below fair value. (I've included some details of my calculations with plots below - just for Mr. Dividend Chimp.)



My DDRM Calculation

I am using 9% Required Return which is slightly lower than my 10% required return.


DDRM

Dividend Rate ($)
1.09
Divided by: share price
36.08
Current yield (%)
3.01
Core Growth Estimate (%)
6.00
Divided by: ROE (%)
9.65
Multiplied by: EPS ($)
2.98
Cost of Growth (%)
1.85
Earnings per Share ($)
2.98
Minus: Dividend
1.09
Minus: Cost of Growth
1.85
Funding Gap ($)
0.04
Divided by: Share Price ($)
36.08
Share Change (%)
0.11
Core Growth (%)
6.00
Plus: Share Change (%)
0.11
Total Dividend Growth (%)
6.11
Plus: Dividend Yield (%)
3.01
Projected Total Return (%)
9.12


Dividend Rate ($)
1.09
Required Return (%)
9.00
Growth (%)
6.11
Price
37.63


Dividend Rate ($)
1.09
Required Return (%)
9.00
Growth (%)
6.00
Price
36.20


Average
36.92


My PE High/Low Calculation


P/E High and Low

High P/E
20.74
Mid P/E
15.17
Low P/E
9.60


High Price
60.15
Mid Price
43.99
Low Price
27.84


Dividend Yields Analysis




Based on the mid and low yields, the corresponding mid and low prices are:


Mid Price:
56.00
Low Price:
37.33


That's it for now! Am I crazy to dump more money on ADM?

D4s

6 comments:

  1. D4s,

    I continue to circle around ADM right now - it's down more than 30% on the year. It appears to be slightly undervalued with a yield that's close to a historic high. Of course, the payout ratio is now a lot higher than it was a decade ago as well, so that should be taken into consideration when comparing the current yield to what it's been over the last decade.

    But I'm also not sure I see anything exceptional about the business. It's a commodity play. I'm not fearful of commodities at all (the world needs certain resources), but the margins here are razor thin. And the rest of the profitability metrics aren't exactly impressive, either. Just not sure if I see enough here or not.

    I'm just really split on it. But I do think the valuation is more compelling than it's been in some time for it, considering all the negatives.

    Best of luck with it! May join you. We'll see.

    Cheers!

    ReplyDelete
    Replies
    1. D4s,

      Also wanted to mention that you have a note in one of your charts above indicating that Morningstar rates the firm with a narrow moat. They actually rate it as a company with no moat at all. Just wanted to let you know!

      Cheers.

      Delete
    2. D4s,

      One more comment. Ha!

      I decided to pick up 15 shares here below $36. Not my favorite business in the world, which is why I'm going in with a small position. But I do like the valuation, all things considered.

      Glad to be a fellow shareholder. :)

      Cheers!

      Delete
    3. Jason, Thanks for your comments - as well as my copy of paste error! Of course, I blame it on my spreadsheet for not checking for me :)
      I agree with you on ADM's commodity business model - when your products are based on corn, etc then you will be affected by the commodity prices.
      Not the best, but I love the dividend history. Growth is not stellar, but stable. It's something I don't mind stocking up in my tax deferred account - though I have a very small position in my taxable account. Glad to be a fellow shareholder too.
      BTW, You definitely have a knack of getting companies at excellent valuations!
      D4s

      Delete
  2. I kind of agree with JF. ADM might not be the 'best business in the world' for many of the reasons he mentioned but with current stock prices where they are it's hard to ignore the value and high yield ADM is sporting these days. I also added to my ADM last week. I may add more if prices remain depressed but do not think this will be one of my "larger" positions long term. Like the buy. I'm on board too!

    ReplyDelete
    Replies
    1. DH,
      Thanks for your input. I agree completely that the valuation is ideal. I don't think I will cycle back to ADM until the go through the rest of my wishlist for the tax deferred account. I will add more in the taxable acct if we see further dips.
      D4s

      Delete