2 market-beating agriculture stocks that would pay you dividends
Credit Suisse named ADM and Bunge among the companies best positioned as inflation spikes. They’re up more than 20% this year, defying the market rout.
Few companies have managed to hold on to their gains this year amid a stock market rout that sent the S&P 500 teetering on the brink of a bear market. Most of those that have are energy and consumer staples, the two sectors proven to be more resilient even amid a recession. After all, fuel and food are the last two items consumers would give up when they cut spending.
As interest rates keep rising, more companies may see their financial health deteriorate if they struggle to repay debt. To find the standout winners among food companies in this environment of higher borrowing costs, we looked for those with low debt levels, using Charles Schwab’s stock screener.
Topping the list are the two agricultural companies that have benefited from rising demand and prices. The war between Ukraine and Russia has disrupted the supply of grains and oilseeds. That resulted in shortages that pushed food inflation higher and increased margins for ag companies, including Bunge (BG) and Archer Daniels Midland (ADM).
In March, Credit Suisse named ADM and Bunge among the companies that are best positioned as inflation spikes. And they didn’t disappoint.
Defying the market slump
ADM has rallied 31% this year, defying the market slump that has sent the S&P 500 index plunging 17%. The agricultural supplier engaged in processing grains and oilseeds has benefited as rising food prices boosted the company’s margins.
The world would need bumper crops in the US and South America over the next 12 months to rebuild global supplies that were disrupted by the war between Russia and Ukraine. Without that, it’s “very likely that current peak cycle conditions will continue well into – if not through – 2023,” the Morgan Stanley analysts wrote in a note May 2.
Bunge shares the same fundamentals that drove the bullish outlook for ADM. As the war in Ukraine disrupted supply, Bunge delivered soy oil from Argentina and canola oil from Canada to customers that previously relied on Ukrainian sunseed oil. That created opportunities to capture higher margins, Credit Suisse analyst Robert Moskow said in a report April 27.
Despite Bunge’s 24% rally this year, the stock is still trading at 9.3 times earnings, cheaper than the S&P 500’s 19.1 times. ADM’s price-earnings ratio is at 16.2.
Are these two stocks a buy?
It depends on what you’re looking for and who among the analysts you’d ask. CFRA equity analyst Arun Sundaram thinks Bunge is a buy, convinced that the company will be able to sustain much of its growth in 2022.
Sundaram thinks the company’s earnings per share forecast of $11.50 this year is conservative, suggesting there’s room for optimism that it could go above that. Apart from stronger margins from crushing oilseeds and higher capacity utilization, the analyst said Bunge will also benefit from the move by US refiners to convert traditional oil refineries into renewable diesel refineries. That would propel demand for vegetable oil over the next several years, Sundaram said.
Barclays analyst Benjamin Theurer is also recommending investors buy ADM, as he expects the price to reach $105 over the next 12 months. He expects market volatility to play in the company’s favor, and he sees its revenue rising 19% this year, Yahoo reported in late April. That would be a 19% gain from Tuesday’s price of $88.41.
Has the rally run its course?
But after the strong rally this year, Morgan Stanley analysts think ADM and Bunge shares already reflect their growth potential. That’s why they downgraded them to equal weight even as they boosted the price target. That means they’re advising clients to give these stocks the same weighting in their portfolio as the typical allocation they get from indexes.
“While earnings are now set to be higher in at least 2022 and 2023, investors have begun to focus on the use of proceeds,” Morgan Stanley said. “ADM and Bunge have both stated that much more interest in reinvesting any excess cash both organically and inorganically rather than returning it to shareholders, which would be our preference.”
Will dividends be enough to entice you?
Investors get an annual dividend yield of 1.8% for holding ADM and 2.2% for owning Bunge, based on today’s prices. Previous performance is never a guarantee that a company could escape the rout unscathed. But if the shares fall under the weight of a massive downturn across assets, at least the payout offers some relief to shareholders seeking to ride out the bear market.
Even while Morgan Stanley analysts Vincent Andrews and Steven K Haynes didn’t recommend investors buy more ADM and Bunge shares than what indexes prescribe, they still raised their estimates and price targets for ADM to $94 from $69 in early May. They also boosted their target price for Bunge to $120, from $98.
Luzi Ann Javier doesn’t own Bunge or ADM shares.
The value of any investment can go up or down depending on news, trends and market conditions. We are not investment advisers, so do your own due diligence to understand the risks before you invest.