Chatter Around the World – 31

Chatter Around the World is a weekly link update of economics, investing, dividends and personal finance articles that have caught my eye. In these weekly updates, I also capture my blog updates and news related to my holdings.

Ghost of 1929 haunts the market

New Blog Posts

Let dive into the links that caught my attention this week.

Updates from My Portfolio Holdings

General Reads

Dividend Reads

Have a wonderful weekend.

Image Source: MarketWatch

Recent Buy – Archer Daniels Midland (ADM)

I added to my position in Archer Daniels Midland (ADM). Archer Daniels Midland is one of the world’s leading agribusiness that manufacturers and sells food essentials, processed agricultural products and value-added feed ingredients. Archer Daniels Midland is a dividend champion that has been paying dividends since 1927 and has been increasing dividends for 39 years in a row.
Corporate Profile (from FinViz):
Archer-Daniels-Midland Company manufactures and sells protein meal, vegetable oil, corn sweeteners, flour, biodiesel, ethanol, and other value-added food and feed ingredients; and processes oilseeds, corn, wheat, cocoa, and other agricultural commodities. The company’s Oilseeds Processing segment originates, merchandises, crushes, and processes oilseeds, such as soybeans and soft seeds into vegetable oils and protein meals. Its products include oilseeds products; crude vegetable and salad oils; margarine, shortening, and other food products; partially refined oils; oilseed protein meals; cottonseed flour; and cotton cellulose pulp. This segment also blends fertilizers; procures and processes cocoa beans into cocoa liquor, cocoa butter, cocoa powder, chocolate, and various compounds; and supplies peanuts and peanut-derived ingredients, and agricultural commodity raw materials. Its Corn Processing segment converts corn into sweeteners, starches, and bio products. Its products include sweeteners, starch, syrup, glucose, and dextrose; alcohol, amino acids, and other specialty food and animal feed ingredients; ethyl alcohol; corn gluten feed and meals, and distillers’ grains; citric and lactic acids, lactates, sorbitol, xanthan gum, and glycols; propylene and ethylene glycol; and sugarcane ethanol. The company’s Agricultural Services segment engages in buying, storing, cleaning, and transporting agricultural commodities, such as oilseeds, corn, wheat, milo, oats, rice, and barley; and reselling those commodities primarily as food and feed ingredients. This segment is also involved in the merchandising of agricultural commodities and processed products; origination and processing of wheat flour; and processing and distribution of formula feeds, animal health and nutrition products, and edible beans. Archer-Daniels-Midland Company also engages in futures commission merchant business. The company was founded in 1898 and is headquartered in Chicago, Illinois.
Recent Buy Decision:
Archer Daniels Midland Company not only operates and provides for one of society’s greatest needs – food, but also another facet of the economy’s staple resource – energy, in the form of ethanol and biodiesel, production of which has continued to rise over the years. The current estimates project increased projection of ethanol production over the next few years which may bid well for ADM.ADM is a well diversified agribusiness which operates at a global level. ADM is the largest exporter of soybean meal from Brazil and is planning to double its South American fleet of river barges to boost shipments of crops – in an attempt to move away from road transport, which led to port congestion and record delays last year in corn and soybean shipments. ADM tried to takeover Australia’s GrainCorp Ltd (AU: GNC), one of the world’s largest grain storage and logistical networks with storage capacities of up to 20 million tons. GrainCorp commands a network of rail and road transportation along with a strategic set of ports for export markets, especially the ever-growing appetites in Asia. The deal, where ADM offered $2B US, was blocked by the Australian government. How this will play out in the future remains an open question.

After a run-up in 2013 of 49.52%, the stock has retreated a bit. The stock is down 8.82% YTD 2014 with a P/E of 17.74 and a Forward P/E of 12.21. ADM is a dividend champion raising its dividends for 39 years in a row. The 5-yr Dividend Growth Rate (DGR) is 13% and the 10-yr DGR is 14.9%. ADM announced in Dec 2013 that it’ll be raising its dividends by 26% and also increasing its payout ratio from the historical 20-25 percent to a more lucrative 25-30 percent going forward. This payout ratio is still sustainable providing shareholders with increased cash flow from ADM’s operations.

Risks:
When it comes to agribusiness, weather can play havoc on the shareholder returns. An unexpected season of drought may result in failed crop harvests and revenues. With the continued global climate changes, this threat remains ever-present. In addition, as the years go by, some of the food has seen prolonged falling prices as production has been abundant and the revenues decline over time. Coupled with the current thin margins currently at ADM, the company has to rely on revenue growth for greater profits.
A summary of the stock:
  • Symbol: NYSE: ADM
  • Quote: $39.57
  • 52-week Range: $28.19 – $43.99
  • P/E: 17.74
  • Forward P/E: 12.21
  • Debt/Equity: 0.35
  • Yield: 2.43%
  • 5-yr average yield: 2.30%
  • 5-yr DGR: 13%
  • 10-yr DGR: 14.9%
  • Graham Number: $38.51
  • Chowder Rule: 15.3
What are your thoughts on the future prospects of ADM?
Full Disclosure: Long ADM. My full list of holdings can be found here.

Chatter Around the World – 30

Chatter Around the World is a weekly link update of economics, investing, dividends and personal finance articles that have caught my eye. In these weekly updates, I also capture my blog updates and news related to my holdings.

New Blog Posts

Let dive into the links that caught my attention this week.

Updates from My Portfolio Holdings

General Reads

Dividend Reads

Have a wonderful weekend.

Image Source: marketoonist.com

Recent Trades – CLF, IMG, KMI

I completed a few trades over last week and decided to club them together into one post. Here’s my recent activity on my positions.
Closed: iShares 1-5 Yr Laddered Government Bond Fund (TSE: CLF)
I decided to reduce my exposure to bonds from my portfolio. At the end of 2013, after combining my portfolio with my wife’s, I figured that our combined portfolio needed some rebalancing. Before this transaction, our combined portfolio had a bond allocation of 16.8%. After this transaction, our bond exposure is down to 13.30%.
Addition: IAMGold Corp (NYSE: IAG, TSE: IMG)
This is purely a speculative play and a hedge. IAMGold cut its dividends recently and currently this is the only position in my portfolio that does not yield anything. However, instead of selling like others, I am holding on and in fact adding to my position. IAMGold is one of the most efficient mining companies and still manages to do well compared to its peers. It is also attractively valued, trading well below its book value. Why own IAMGold? I have multiple reasons – (a) it is an inflation hedge, (b) it provides me with some hedge against a stock market drop, (c) it is attractively valued trading well below book value and very low debt (0.17) and (d) it could possibly be a target of acquisition.

Addition: Kinder Morgan Inc (KMI)
I added to my position in Kinder Morgan Inc (KMI). I had started with a small position earlier in the month and have increased it after some weakness in the market over the last few days. After this transaction, I own 60 shares giving me $98.40 in annual distribution income from KMI. I want to add more to this position and will be looking for weakness in the market/stock to pull the trigger.

 

To DRIP or Not To DRIP

Dividend Reinvestment plans (DRIPs) are investment programs run by publicly traded companies to invest in them and provide shareholders with partial shares reinvested back in the company instead of paying out cash dividend each quarter (or whatever the dividend schedule is). This is advantageous to the companies since they can keep the money in the company where it can be put to good use while providing investors in more stake of the company through the share reserve. Companies usually run these programs through a Transfer Agent or a Brokerage firm. This article takes a look at the overview of the DRIP program and the various advantages and disadvantages to investors using this methodology.
When investing via DRIP, there are couple of terms used liberally and I want to include them here as I use them in the article below. A Share Purchase Plan (SPP) allows you to buy more shares in the company in the future.  This is usually a recurring event that you setup with the Transfer Agent or Broker. An Optional Cash Purchase (OCP) is a one-time optional purchase of more shares in the company. 
The following are the advantages and disadvantages of the DRIP program.

Advantages of DRIP

  1. Commission-free: Enrolling in the DRIP program does not cost the investor any money. The program is sponsored by the company and so, there are no brokerage fees or transaction fees to worry about.
  2. Partial shares: Investors can choose a certain dollar amount to contribute by enrolling in the SPP or using the OCP to buy partial shares in the company. When dividends are scheduled, partial shares from the reserve are allocated instead of distributing the dollar amount.
  3. Faster Reinvestment: This point is best illustrated by comparing synthetic and full DRIP. Synthetic DRIP is the DRIP supported by most discount brokers, where the dividend amount needs to cover a whole share. Full DRIPs, on the other hand, work with partial shares as well. The advantage of Full DRIP is that money gets reinvested immediately, even with partial shares, and investor’s money can be put to work effective immediately.
  4. Discounts: Some companies provide discounts for registering in the DRIP program. These discounts can vary anywhere between 1-5%, which means higher dividend rate and yield-on-cost on your overall returns.
  5. Dollar Cost Averaging: Enrolling in SPP or using OCP offers investors with the opportunity of taking advantage of dollar cost averaging. This is one of the cornerstones of long term investing and you are able to build your equity slowly.

Disadvantages of DRIP

  1. Setup Effort: Setting up the program and getting started takes a lot of time and effort. Also, getting your first share and setting up is confusing for starters which deters people from enrolling in these programs.
  2. No Control on Stock Price: Due to the way the payment structures are setup with SPP  or OCP, the investor can only choose the amount of money invested and has no control of the price paid on the stock. The Transfer Agent or Broker simply takes the closing market price of the stock on the date it chooses to execute the plan.
  3. Where’s the money? If you depend on and need to withdraw income from your investments, DRIP programs do not work out, as you don’t actually see the money. All you get is more equity in the company.
  4. Taxation: Although listed as an advantage by a lot of writers (due to dividends being taxed favorably), taxation can be a double-edged sword. I consider taxation more of a disadvantage than an advantage due to the fact that there is no tax-shelter when investing using a DRIP program. Consider all the taxation involved when investing via DRIP – (a) the companies pay out their dividends after it has paid its due taxes, (b) you are investing in the company after paying your income taxes, (c) you pay taxes on the dividends received, and (d) you pay taxes on the capital gains. If the money was invested in registered accounts instead, you would be sheltered from some of the taxes mentioned earlier.
The taxation point is a big thorn for me personally. Even though I have a DRIP account with one company – The Bank of Nova Scotia (BNS), I am not convinced that DRIP programs are that great. Do you think there is any value in DRIPping outside tax-sheltered accounts (even with the DRIP discounts)?
To learn more about DRIPs, go to DRIP Primer and DRIP Investing.
Disclosure: I am long BNS. See my full list of holdings here.