When prices for agricultural products creep up, it proves to be a boon for farmers and each piece of grain and drop of milk they produce. While it's not feasible for the average person to take to the plow, investors can get a piece of the action by entering positions in agricultural-related companies as a pick and shovel play. The rationale is that farmers will need the best seeds, fertilizers, animal feed and other agricultural inputs in hopes of producing the largest crop yields possible. Therefore, the companies that are supplying farmers should be in for decent yields of a financial sort.
However, for income-oriented investors, it can be difficult to find a cost-effective way to increase exposure to agriculture equities while also obtaining a satisfactory dividend return, since many companies in this sector often reinvest profits rather than distributing money to shareholders. But it can be done, and to prove it, here is a list of dividend-paying agro stocks which, though not immune to financial ups and downs (and the strength of the U.S. dollar), tend to be solid performers.
In Monsanto Co.'s (MON) third quarter in 2017, net sales came in at $2.68 billion vs. $2.56 billion in the year-ago quarter – practically flat. Earnings-per-share registered $1.90 vs. $3.09 in the previous quarter. The St. Louis-based seeds and weed-killing chemicals company cited two industry-wide headwinds: declining corn acres and U.S. dollar appreciation.
So why is Monsanto included on this list? Because Monsanto expects to double ongoing earnings per share by 2019. And after bopping around $100 in 2016, its stock has been steadily rising; it's now around $122 – within sight of the $128-per-share buyout price paid by Bayer AG (BAYR) to acquire it in September 2016. The deal expected to close in early 2018.
So consider this as an investment, not a trade. As far as the dividend goes, Monsanto currently yields 1.77%. This isn’t the highest in the world, but a lower dividend helps keeps costs lower, which is a positive when the industry is suffering a setback. Monsanto has a debt-to-equity ratio of 1.12, which is neither impressive nor troubling.
With a low yield, a steady if undramatic demand for the stock, and the broader market potentially living on borrowed time, Monsanto shouldn’t be seen as the safest investment or the best option on this list. However, if you’re patient, you should eventually be rewarded. (For more, read: Who Are Monsanto's Main Competitors?)
Terra Nitrogen Co.
This is a much different type of play. Terra Nitrogen Company, L.P. (TNH) has a market cap of $1.47 billion, whereas Monsanto has a market cap of $53.63 billion. While Monsanto presents some risks, Terra Nitrogen should only be considered by those who are immune to risk; this stock will be more volatile.
The bad news is that second quarter 2017 net earnings were $154.60 million vs. $285.60 million in the year-ago quarter. The stock has also depreciated nearly 25% over the past year while the S&P 500 is up over 18%. This is simply not beating the market.
The reason Terra Nitrogen makes this list: I has a very generous 6.99% annual dividend yield to go along with a stellar balance sheet – $193 million in total cash vs. no long-term debt. Add $405.30 million in operational cash flow generated over the past year and the dividend appears to be safe at the moment.
Agrium Inc. (AGU) has been the best-performing stock of this group over the past year, enjoying a 9% ride. This is to go along with a 3.50% annual dividend yield. With a debt-to-equity ratio of 0.86, Agrium isn’t overleveraged.
With retail and wholesale operations in North America, South America, Australia and Egypt, 1,300 retail facilities and 3,000 crop consultants, Agrium should be able to continue to grow its top line in future years. The bottom line has been sliding, partially due to an increase in SG&A expenses, but this is a relatively easy fix. (For more, see: A Huge Opportunity in Fertilizer Stocks.)
Agrium is an interesting play, but still not likely to be the best long-term performer, a title which should belong to the next — and last — company on the list.
Revenue and net income for the company now known as DowDuPont (DWDP) had been moving sideways over the past few years, but DuPont was just weathering the storm, which it has plenty of experience in doing. Consider the headwinds the firm, founded in 1802, has had to fight through: the Long Depression (which started with the Panic of 1873), the Great Depression, WWI, WWII, stagflation in the 1970s, the Great Recession, and plenty in-between. If DuPont could handle these challenges, then it can likely handle almost anything.
Especially now that its merger with Dow Chemical is complete. The news of the all-stock transaction, announced in September 2016, sent Du Pont shares climbing steadily to hit a 52-week peak at the beginning of 2017 (see DuPont Stock Nets 52-Week High After Q4 Beat). Both companies' boards of directors decided that following the merger, DowDuPont would pursue a 18-month separation into three independent, publicly traded businesses: an agriculture, a materials science, and a specialty products company. The agriculture business would unite Dow and DuPont’s seed and crop protection unit, with an approximate revenue of $16 billion.
By creating a single, independent, U.S.-based and -owned agriculture company, Dow and DuPont would be able to compete against their still larger global peers – and become a purer agricultural stock play. Morgan Stanley for one is bullish, offering in a September report, "We believe that Ag Co. provides several ways to win. We expect this asset to garner a premium to peer multiples…as 2017 has shown stability in seed pricing and some improvement in crop chemistry inventory levels."
For now, with the merger occurring right at the beginning of September 2017, the new entity has returned 10.05% in its first month. DowDuPont’s TTM P/E ratio is 32.76, and earnings per share are $2.16. No dividend has been announced, naturally, but in the past, DuPont characteristically declared $0.38 per share, with a forward yield of 1.8%, while Dow declared $0.46 per share, with a forward yield of 2.8%. So current DuPont shareholders might get a bump next quarter. Synergy!
Three More Good Ones
In addition to the quartet above, here are three more agro stocks to know.
|Company||Market Capitalization ($ bil.)||Dividend Yield|
|Deere & Company (NYSE: DE)||41.29||1.86%|
|Compass Minerals International (NYSE: CMP)||2.19||4.38%|
The Bottom Line
These dividend-paying agro companies all offer something different. The one with the highest yield comes with the biggest risk on the stock performance side. The good news is that as the world's population increases, so will demand for food, which is a long-term positive for any fiscally sound company.
(For more, see: Choosing an Agriculture ETF.)