3 Agriculture Stocks For Long-Term Dividend Growth

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Technological progress greatly improves our lives but it poses great challenges to investors. Many companies that used to thrive have gone out of business or have seen their earnings collapse, as technology has rendered their business obsolete. Agriculture stocks are a great exception to this rule. As the global population grows, the need for improved agricultural production and efficiency increases. This creates a long-term growth driver for this group of stocks. In this article, we will discuss the prospects of three agriculture stocks, namely Archer-Daniels-Midland (ADM), Tractor Supply Company (TSCO), and FMC Corporation (FMC), which offer the potential for long-term dividend growth.
 

Archer-Daniels-Midland

Archer-Daniels-Midland is the largest publicly traded farmland product company in the U.S. It has a history of 120 years and its businesses include the processing of cereal grains and oilseeds as well as agricultural storage and transportation.

Archer-Daniels-Midland enjoys significant competitive advantages thanks to its vast scale and global reach. In addition, the company has repeatedly proved resilient to recessions, as people do not reduce their consumption of food even under the most adverse economic conditions. The resilience of Archer-Daniels-Midland has been evident throughout the coronavirus crisis. The company achieved all-time high earnings per share in 2020 and 2021. Even better, it has maintained its strong business momentum in 2022 and thus it is poised to grow its bottom line by about 44% this year.

Archer-Daniels-Midland has exhibited a somewhat volatile performance record, primarily due to the cyclicality of commodity prices. Nevertheless, the company has managed to grow its earnings per share at a 9.7% average annual rate over the last decade. Even better, it has promising growth prospects ahead thanks to the acquisition of Ziegler Group and the nutrition flavor research and customer center opening. Archer-Daniels-Midland will benefit from new eating trends, such as alternative proteins. Its nutrition segment has been growing its earnings by 15%-20% per year. As a result, the company is likely to continue growing its earnings per share meaningfully in the upcoming years.

The strength of the business model of Archer-Daniels-Midland is clearly reflected in its exceptional dividend growth record. The company has grown its dividend for 47 consecutive years. It is also remarkable that Archer-Daniels-Midland has outperformed the broad market by an impressive margin over the last 12 months, as it has rallied 44% thanks to its outstanding business performance whereas the S&P 500 has shed 16%. Due to its impressive rally, the stock of Archer-Daniels-Midland is currently offering a nearly 10-year low dividend yield of 1.7%.

However, the company has grown its dividend by 5% per year on average over the last five years. Given its exceptionally low payout ratio of 21%, its strong balance sheet, and the ample room for future growth, Archer-Daniels-Midland can easily continue raising its dividend at a mid-single-digit rate for many more years.
 

Tractor Supply Company

Tractor Supply Company is a retailer that sells farm and ranch products. Its customers include recreational farmers and ranchers, tradesmen, and small businesses. Its product portfolio includes clothing, pet supplies, trailers and accessories, lawn & garden supplies, heating systems, tools, fencing, lawnmowers, and power generators.

Tractor Supply enjoys a wide business moat, as there is little competition in the niche market of the company. Other retailers have been severely hurt by the impact of Amazon (AMZN) and other online retailers but Tractor Supply has proved resilient, as most of its products are large and complex and hence it is hard and impractical to purchase them online.

The business moat of Tractor Supply is clearly reflected in its consistent performance record. During the last decade, the company has grown its earnings per share every single year, at an 18% average annual rate. The impressive growth rate combined with the consistent performance are testaments to the strength of the business model of Tractor Supply and its solid business execution. Moreover, Tractor Supply has maintained its strong business momentum this year and thus it is on track to grow its earnings per share by 12%, to a new all-time high.

Tractor Supply has also proved resilient to recessions. In the Great Recession, when most companies saw their earnings collapse, the earnings per share of Tractor Supply dipped only 10% and recovered swiftly, hitting a new all-time high in 2009.

Tractor Supply has grown its dividend for 12 consecutive years and is currently offering a nearly 10-year high dividend yield of 1.8%. This yield is lackluster on the surface but the company has grown its dividend by 26% per year on average over the last decade and by 28.5% per year on average over the last five years. Given its pristine balance sheet and its solid payout ratio of 38%, Tractor Supply can easily continue raising its dividend at a double-digit rate for many more years. Given also its wide business moat, the stock is ideal for investors with a long-term horizon.
 

FMC Corporation

FMC Corporation is an agricultural sciences company that provides crop protection, plant health, and professional pest and turf management products. Thanks to a series of acquisitions, FMC has become one of the five largest patented crop chemical companies. The company markets its products through its own sales organization and through alliance partners, independent distributors, and sales representatives. It operates in North America, Latin America, Europe, the Middle East, Africa, and Asia.

FMC has exhibited a somewhat volatile performance record. Nevertheless, it has managed to grow its earnings per share by 8.0% per year on average over the last decade. It is currently facing a headwind due to the surge of inflation to a 40-year high but it has offset increased cost inflation with material price hikes. As a result, it is on track to grow its earnings per share by 7% this year, to a new all-time high.

Moreover, it has multiple growth drivers in places, such as secular growth in the global demand for fertilizers and a healthy R&D pipeline of products. Overall, it is reasonable to expect FMC to continue growing its earnings per share at a rate close to its historical growth rate of 8.0%.

FMC froze its dividend during the years 2015-2018 and hence it has grown its dividend for only 4 consecutive years. The stock is offering a 1.9% dividend yield, which is lackluster but is also a nearly 10-year high dividend yield for the stock. Given its healthy payout ratio of 29%, its strong balance sheet, and its promising growth prospects, FMC can raise its dividend meaningfully for many years.
 

Final Thoughts

Technological progress has disrupted so many businesses that the buy-and-hold-forever strategy has become highly risky in most sectors. Agriculture stocks are a bright exception to this disruption, as their business is essential for the prosperity of consumers. The above three agriculture stocks enjoy meaningful business moats, they have proved resilient to recessions and are offering dividends with a wide margin of safety and the potential to keep growing for years.


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