Wednesday, January 23, 2013

Recent Sell

Yesterday I sold out of my position in Archer Daniels Midland (ADM).  I still like them long-term due to them being tied to food production which the need for that is only going to grow from here as the global population continues to expand; however, short-term I see issues that could possibly lead to a dividend cut.  I figured it's better to regret the dividend growth going forward by getting out now rather than sticking around and having to deal with a dividend cut.  I don't think it's definitely going to happen but after going through Avon's results that led to their dividend cut that shed some light on potential problems with ADM.  Plus ADM was due for a raise with their last payout but did not increase it then.

I initiated my position in ADM back in August 2012 by picking up 35 shares for $25.73 and after one dividend payment that brought in another 0.229 shares my total cost basis was $914.64.  I sold all of my shares for $29.09 each giving me a profit of $102.22.  This is a 11.18% return with a 11.93% total return from the original purchase.  This is going to reduce my forward 12-month dividends by $24.66 so I'm not too worried about being able to find an adequate replacement.

The reason I sold out of the position is their FCF is very shaky.  In all honesty I probably shouldn't have purchased the shares to begin with but luckily it turned out that I was able to get a pretty nice return.


Their FCF has been all over the place since 2001 and has me a little worried about their prospects over the next few years so I decided that I should part ways and find something else to invest in.  If their operations clean up over the next few years I wouldn't mind jumping back in if the price is right.

16 comments:

  1. Good move (of course, this is coming from someone who made the same move earlier this month). I agree that ADM should do okay in the long term, but its FCF volatility is disconcerting from a dividend growth perspective. I prefer to own companies with businesses that are more stable.

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    1. DGM,

      That should have kept me from investing in the first place, but the value was there to at least get a nice total return from it. There's just too many issues with the existing company and now trying to go through the process of buying out Graincorp brings on a whole other set of issues.

      Thanks for stopping by!

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  2. I never bought any ADM but I was really close to doing so when you guys pulled the trigger. Instead I sold some puts that didn't get executed. I agree that they could be doing well long-term but I don't like any company that relies on the weather. I want a company that is more predictable.

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    1. Wish I had sold the put instead, but it turned out okay since I was still getting in very cheap. How'd you end up doing on those ADM puts? ADM definitely is a little more volatile since they're tied to commodity prices and the weather. And bad weather leads to higher commodity prices so it's a double whammy.

      Thanks for stopping by!

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  3. Looks like a good move there. It will be interesting to see if the dividend will increase this quarter, I will keep an eye on it...

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    1. CI,

      I expect that they'll increase the dividend, but their operations seem a little too volatile for my liking though. FCF is so up and down that I figured I might as well just get out while I'm ahead. It's never wrong to take a profit.

      Thanks for stopping by!

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  4. Pursuit,

    Looks like a reasonable move to me. The risk/reward relationship with this stock doesn't seem particularly favorable. The yield isn't very high, the growth of said dividend is currently in question and the FCF has been noticeably volatile. Doesn't add up to a very compelling investment.

    The nice thing is that you still made a gain, it isn't a huge part of your portfolio and you'll likely be able to actually increase your dividend stream anyway by way of a higher yielding stock. Good stuff!

    Best wishes!

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    1. DM,

      I'm looking forward to redeploying the capital. And you're right, a profit is always nice. I'll be able to increase my income either through added income from selling puts or by purchasing a higher yielding stock so I'll take my money and run. Hopefully the business clears up over the next few years because I like their prospects in the long term.

      Thanks for stopping by!

      Delete
  5. Great move. You're taking a rational approach to investing. Sometimes investors (like me), get too emotionally attached to a stock and don't make the necessary moves, even when we know we should. I've always felt the buying part of investing was easy, but the selling part was always more hazy.

    I started to lose confidence in AAPL back in late October/November and was thinking about cashing out then. I also knew it didn't really fit in my portfolio. But I was too complacent, and am paying the price now.

    Cheers!

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    1. FI,

      It was still hard to sell but my YOC was still only 2.70% and the current yield was down to around 2.40% so it's not like the payouts were anything spectacular. Plus I was able to lock in a 10%+ gain in about 4.5 months, not too shabby.

      AAPL's slide has been interesting. Anytime I've run across a post or article about someone selling it the comments are very split as to whether this was the wrong move since it might be at the bottom or the right move because it's going to continue lower. Personally I don't understand the love affair with AAPL's products although I have to admit that I've never really played around on them other than a few minutes here and there at Best Buy. What confuses me the most is the fact that it's a completely closed system and they are so darned expensive. But to each their own.

      Thanks for stopping by!

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  6. Certainly in light of your previous article about dividend cuts, this looks like a good move. I can understand negative cash flow during the recession, but the 2011 fall in FCF is worrying. However, what was the reason for the dip in FCF? Just bad sales or did they make some kind of a major investment?

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    1. Some of ADM's metrics are great and others pretty disappointing. Like I've said before I don't think the company is going anywhere, but there's better opportunities in the short-term which I see as being a rough time for ADM. Of course, they'll probably come out and announce a 15% increase to their dividend.

      Thanks for stopping by!

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  7. Good call, that dividend cut is definitely a reason to sell. Since the stock is a food related, new Congressional laws could impact their business. I hear that Congress may cut farm subsides in the near future.

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    1. Brett,

      The trouble spots are piling up so I'd rather get out now with a nice profit and then reevaluate later. We'll see if the farm subsidies end up getting cut, I know that's one of the areas that's discussed almost every year about cutting.

      Thanks for stopping by!

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  8. Almost 12% return is a good satisfaction for the fact you are selling a stock which you are no longer comfortable to hold. You may always get back if you see the stock improving.

    Your experience with AVP makes me thinking on studying more how to avoid or spot potential cuts.

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    1. Martin,

      I'll take a just under 12% total return in a little over 4 months any day. Especially when in hindsight I probably shouldn't have bought the stock in the first place. If they can get back on track I'll have no problem getting back in.

      I want to read up more on other companies that had nice growth streaks and then had to cut them to see what happened to try and learn what to look out for.

      Thanks for stopping by!

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