Recent Buy (15)

Purchases for my FI Portfolio have been few and far between the last few years.  That's not for lack of opportunities or desire rather it had to do with our lives being on a roller coaster.  However, there's a light at the end of the tunnel as our main goal for this year is to get rid of all non-mortgage debt and then refocus our energy towards building up the portfolio.  

We aren't contributing fresh capital to our investments just yet as we're focused on getting rid of our non-mortgage debt.  However, that doesn't mean that we're not able to make new purchases thanks to the dividends that keep rolling in from our other positions and some sales that we've made.  Although I'm hopeful to start making at least one regular purchase each month starting in September!

One of my goals for my FI Portfolio for 2019 is to build up the positions rather than build out the number of positions.  Essentially I want to increase my exposure to the companies that I own instead of many smaller positions that make it hard to be motivated to monitor the company.  With the dividend growth strategy I still think it's fine since the bulk of the work is done upfront; however, I still think that in general the less the better.

That's just what I did last Friday during the afternoon selloff.  I added more shares of Archer Daniels Midland (ADM) to my portfolio making it 3 separate purchases now and plans to add more should the share price continue to decline.

I purchased an additional 25 shares of Archer Daniels Midland on August 23rd for $37.25 per share.  After commissions, the total cost basis comes to $936.20 or $37.45 per share.  Based on Archer Daniels Midland's most recent dividend payment of $0.35 per share, this lot carries a YOC of 3.74% and I can expect to receive $35 in dividends over the next year.  Archer Daniels Midland is a Dividend Champion with 43 consecutive years of dividend growth.  

I've now averaged down my cost basis twice since I first added Archer Daniels Midland to my FI Portfolio in February.  The first average down came at a 11.6% lower price than my original purchase and further weakness in the share price saw a 17.0% lower price than my first purchase.

I now own 70.436 shares of Archer Daniels Midland with an average cost basis of $40.87 per share.  The entire position carries a YOC of 3.43% and I can expect to receive $98.61 in annual dividends.  At the current price of $37.43 that would equate to an additional 2.6 shares through reinvestment.



Due to this purchase my FI Portfolio's forward 12-month dividends increased to $7,400.86.

Dividends

As a dividend growth investor any potential investment must Jerry Maguire me, i.e. "SHOW ME THE MONEEEEEEYYYY!!!!".  I judge that based on a company's history of both paying and growing dividends to shareholders.  Archer Daniels Midland's 43 year streak of rising dividends certainly qualifies them as a prolific dividend grower.  
 

*A full screen version can be found here.

For companies such as Archer Daniels Midland, I prefer to look at dividend growth over the full business cycle rather than for any given year.  The reason being that ADM is essentially a commodity business with very little pricing power, as such scale, efficiency and ability to withstand the "storms" play a bigger role in the business' outlook.

Of the 20 rolling 5-year periods starting in 2000, annualized dividend growth has ranged from 5.0% to 16.7%.  The average annualized dividend growth rate has been 11.5% with a median of 12.0%.

Of the 15 rolling 10-year periods starting in 2005, Archer Daniels Midland's annualized dividend growth has ranged from 9.6% to 14.1%.  The average annualized dividend growth rate works out to 11.8% while the median is 12.2%.  

The 1-, 3-, 5- and 10-year rolling dividend growth rates since 1995 can be found in the chart below.  

*A full screen version can be found here.

Valuation

One valuation method that I like to use is dividend yield theory.  The idea behind dividend yield theory is that large, stable companies will see their dividend yields revert to their mean over time.  So when the yield is higher than "average", shares are undervalued and when it's lower than "average", shares are overvalued.

*A full screen version of this chart can be found here.

The 5-year moving average dividend yield for Archer Daniels Midland currently sits at 2.83% while the YOC for the latest lot is a very healthy 3.74%.  Based on dividend yield theory that suggests a fair price of $49.47 or roughly 32% higher than my purchase price.

Based on a quick and dirty Gordon Growth Model calculation Archer Daniels Midland needs to grow the dividend at 6.04% per year in order to generate 10% annual returns which I believe is achievable for Archer Daniels Midland over the long term.

When examining the valuation multiples of Archer Daniels Midland, the valuation looks compelling.  Based on TTM earnings, shares are trading at a 16.1x P/E ratio.  Looking ahead to the estimates for FY 2019 and the P/E sits at 13.2x while FY 2020's estimates have shares valued at a 10.7x P/E.

I've also started looking at multiples using enterprise value.  The reason I like using enterprise value is that it encapsulates purchasing the entire business, both the equity and the debt, net of cash.  I think this better encapsulates the true cost to buy the business.  Using EV/EBIT, Joel Greenblatt's Magic Formula valuation metric, Archer Daniels Midlan is trading at a 15.3x EV/EBIT multiple or a 6.5% EBIT yield.  Looking at EV/EBITDA it's 10.2x or a 9.8% EBITDA yield.

Conclusion

Archer Daniels Midland's share price continues to get punished with every escalation in the trade war.  That's perfectly fine by me though since it allows me to add more shares at more compelling valuations.  

When I last completed a stock analysis on Archer Daniels Midland I pegged the fair value somewhere between $45-$50 per share which I think is still a fair price. 

I'd still like to add more shares to my portfolio; however, with cash being a little light currently I'll be holding off for a share price at $35 or lower.  Additional buys at that level would give a 4.0% starting yield and would be at a >20% discount to the low end of what I consider fair value.  

We've made some good headway on the debt reduction and one of the car loans will be paid off either before the end of August or sometime in September.  Once that car loan is gone the current plan is to transfer enough savings each month to make one purchase, ~$1k, with the remaining cash flow going to debt reduction and building up our cash reserves.  So needless to say I'm pretty excited about what the remainder of 2019 can bring.

I've started compiling the dividend history, growth rates and dividend yield theory for many dividend growth companies.  Archer Daniels Midland's can be found here and the remaining companies that I've already gathered the data on can be found here.  As new companies are added the list will be updated.

What do you think of my purchase of Archer Daniels Midland?  Did you add any shares on further weakness?