The Fight for More Food Brings Growth with a Dividend
May 23, 2019
Food, glorious food! We as Americans love to consume more and more food. And we continue to do so at an increasing pace. So much so, that according to the US Center for Disease Control (CDC), 36.50% of the population is considered obese.
But we are not alone. On a global scale, food continues to be in demand, fueled by a continuing rise in population. And it is also about quantity and quality on a per-capita basis, with emerging and transitioning nations’ populations demanding more and better food.
One of the global think tanks that is looking at the market for food is the Consultative Group for International Agricultural Research (CGIAR), which is based in Montpellier, France. It is projecting that global agriculture production must rise by 60% or more by 2050 just to meet existing population growth estimates.
One of the biggest limitations to further agriculture production is available arable land and available irrigation. To make the most of the land and water, the industry needs to increase the yields from crops that in turn are used for direct consumption or animal feed.
Luckily, the world continues to advance in seed technology and in the chemicals that work to make the most of mass crop production while cutting the impacts of weeds and pests.
One of my favorite companies in this segment was Monsanto, which is now part of Bayer (BAYRY). That company is embroiled in legal disputes over the widely produced and used herbicide known as glyphosate.
A better alternative is found in FMC Corporation (FMC). This Philadelphia-based company has been in existence since 1884 with its introduction of industrial pumps for insecticides. The company has been involved in numerous industrial and mineral businesses, having started, acquired and divested various companies that have gone on to further successes including its recent spin-off of lithium company Livent Corporation (LTHM).
It is now a fully focused agricultural chemical company with a series of insecticides, herbicides, fungicides and biologics that are utilized around the globe. More importantly, its products are used and approved in China where it is ramping up its market share as that country embraces its products out of necessity. In addition, it also is doing well in the regulatory tough European Union, with strong market shares in Germany and France. And of course, it has eager farmers utilizing its products in major markets, including the US, Brazil, Mexico, India, Australia, Canada and others.
It has a series of existing products that are deployed in fruit and vegetable production as well as grains, including corn and the important soy market. It even is widely used in cotton production.
It is also ramping up its laboratories, with 22 new ingredients being brought to the market over the coming quarters. And one of its bigger additions to its capabilities came from its acquisition of Dupont Crop Protection.
Revenues are rising strongly, with trailing gains over the past year of 64.20%. It also has impressive operating margins running at 18.60%. This is driving a strong return on shareholder’s equity in the company of 17.20%.
Despite its acquisitions, it has ample cash on hand and very limited debt, which is only 27.30% of its assets.
FMC Harvests Profits
Total Return Compared to the S&P 500 Materials Index—Source: Bloomberg Finance, L.P.
The shares have delivered an impressive return over the past three years of 118.15%. This compares well against the industrial materials market as tracked by S&P, with its index return of only 30.75% for the same time period.
But it is also a bargain, along with its more industrial peers, as the stock market has been ignoring the space in favor of more engaging market segments such as technology.
The stock is valued at only 3.38 times its underlying book value. And the underlying book value has been climbing, with the company adding to its book of assets by 68.98% from the first quarter of 2017 to date alone. The stock is trading at a mere 2.30 times its trailing sales, which as noted above have been significantly on the rise.
The one drawback to this company is that it is stingy with its profits, as it favors re-investing in product development and market sales efforts around the globe with a retention ratio of profits running at 81.30%. Its dividend payout ratio is only 18.70%, which is incredibly low. This results in a dividend yield of only 2.30%. But the distribution amounts are up 71.21% over the past year and are up annually on average by 15.28% over the past five years.
With the world needing higher production and crop yields, FMC Corporation and its agricultural product producing assets are well-positioned to deliver both while building share value with a dividend on top.
While I’ve identified this opportunity for cashing in on solving for the globe’s challenges while paying dividends along the way, I have an even more opportunities for additional income in my Profitable Investing advisory.