The S&P 500 has more than doubled off its bottom in 2020, with 70 new all-time highs in 2021. As a result, income-oriented investors are now struggling to pinpoint reasonably valued stocks with attractive dividends. Archer-Daniels-Midland (ADM) is a bright exception.

Thanks to its promising growth prospects, its reliable dividend, and its cheap valuation, Archer-Daniels-Midland is a top Dividend Aristocrat for 2022.

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Business Overview

Archer-Daniels-Midland is the largest publicly traded farmland product company in the U.S. It was founded in 1902 and its businesses include the processing of cereal grains and oilseeds as well as agricultural storage and transportation.

Thanks to the essential nature of its business, Archer-Daniels-Midland has proved resilient throughout the coronavirus crisis. In 2020, which was marked by unprecedented lockdowns and a fierce recession, the company grew its earnings per share 11%, to an all-time high of $3.59.

Business momentum accelerated in 2021. In the third quarter, Archer-Daniels-Midland grew its revenue 34% over the prior year’s quarter thanks to strong demand and robust oilseed crushing margins. In addition, despite a higher tax rate, the company grew its adjusted earnings per share by 9%, from $0.89 to $0.97, and exceeded the analysts’ consensus by $0.08. It was the eighth consecutive quarter of year-over-year profit growth.

Management expects the strong momentum to remain in place in the medium term and provided guidance for record earnings in 2021. We expect the company to have grown its earnings per share by 37% in 2021, from $3.59 to $4.90.

Growth Prospects

Archer-Daniels-Midland has struggled to grow its profits over the last decade. Notably, the company failed to achieve meaningful growth of earnings per share between 2011 and 2019.

However, Archer-Daniels-Midland has improved growth prospects ahead thanks to the acquisition of Ziegler Group, and the nutrition flavor research and customer center opening. The company will benefit from new eating trends, such as alternative proteins. Its nutrition segment has been growing its profit by 15%-20% per year. Thanks to this major growth driver, Archer-Daniels-Midland expects to grow its earnings per share to an all-time high level between $6.00 and $7.00 by 2025. We agree with the guidance of management and accordingly, we expect the company to grow its earnings per share by 6.0% per year on average over the next five years.

Dividend

Thanks to the essential nature of food products, Archer-Daniels-Midland has proved resilient to recessions. As a result, the company has grown its dividend for 46 consecutive years, with an average annual 5-year dividend growth rate of 4.3%. As the stock is currently trading at an all-time high level, it is offering a 2.1% yield, which is lackluster on the surface. However, thanks to the solid payout ratio of 30% and the promising growth prospects of Archer-Daniels-Midland, investors should rest assured that the dividend will remain on the rise for many more years.

Valuation – Expected Return

Based on expected earnings per share of $4.90 in 2021, Archer-Daniels-Midland is trading at a price-to-earnings ratio of 14.3. Our fair value estimate for the stock is a price-to-earnings ratio of 15.0. If the stock trades at our fair valuation level in five years, it will enjoy a 1.0% annualized boost in its returns. Given also the 6.0% expected earnings growth rate and the 2.1% dividend yield, the stock can offer an 8.7% average annual total return over the next five years. This is certainly an attractive expected return, particularly given the full valuation of the broad market.

Final Thoughts

Due to the impressive returns of many high-tech stocks in recent years, many investors dismiss stocks with mundane business models. However, this type of stocks sometimes offers exceptionally high returns. Given the full valuation of the broad market, investors should pay attention to the cheap valuation and the promising growth prospects of Archer-Daniels-Midland and purchase the stock, despite its all-time high price.