Dividend Investing Ideas Center
Have you ever wished for the safety of bonds, but the return potential...
Aaron Levitt May 26, 2016
Sixty-two billion dollars. That’s a lot of coin. It’s also the amount of money that German drugs and crop chemicals group Bayer AG has made for genetically modified seed and fertilizer specialist Monsanto Liquid error: internal . The all cash buyout price would be the largest unsolicited offer ever— by about $2 billion— and represent a 37% premium to MON shares.
If approved, the deal itself is a nice bonus for Monsanto shareholders. However, for the rest of us, it does highlight an interesting fact. The agriculture stocks are extremely undervalued. The deal follows several other major agriculture stock- related mergers and buyouts in recent months. All coming at large premiums to current share prices.
While buying on the hope of a buyout is a stupid strategy, buying undervalued companies and collecting some pretty impressive dividends is not. The bulk of agriculture sector fits into the latter camp.
The MON/BAYRY deal is just one example of firms in the sector shacking up. DuPont (DD ) and Dow Chemical (DOW ) are in talks about joining forces. That merger of equals was very much about seeds, crop nutrients and weed killer rather than commodity chemicals. The same can be said for ChemChina’s $43 billion buy-out of Syngenta Liquid error: internal.
The reason for the rise in buyouts and M&A activity can come down to the fact that stocks in the agriculture sector have just gotten so cheap relative to their long term outlooks.
As China has begun to slow, it voracious demand for all things commodity has hit prices for various agriculture commodities especially hard. Near term demand just simply isn’t there. Stock piles remain relatively high. Not helping the cause has been better weather around the globe as well as the rising dollar. Better weather conditions, for the most part, has help extend growing seasons of many agriculture stock commodities, while the rising dollar has hit direct pricing for all natural resources.
All of this has hurt the various agriculture stocks right in the wallets. There’s less need for specialty chemicals, seeds, tractors and other equipment. As a result shares for the sector have been hit hard. The broad-based Market Vectors Agribusiness ETF (MOO ) is down nearly 16% over the last 52 weeks. Likewise, the fertilizer heavy Global X Fertilizers/Potash ETF Liquid error: internal is down about 28%.
Those are some pretty nasty drops over the relatively short period of time. But it’s enough for firms to seriously start buying out rivals. And it could be enough for investors to start planting agriculture stocks into their portfolios as well.
The long term picture is certainly much rosier. Today’s worldwide population sits at around seven billion people. That’s already a lot of mouths to feed. However, forecasts estimate that by 2040, that number will rise to 9 billion. To feed our expanding world, food output will have to increase by roughly 70% over the next four decades just to keep up with demand.
That’s a much different demand situation that the near term and ultimately result in rising prices and profits for the agriculture stocks. The sector sees this coming and is using the downturn to position themselves accordingly by buying up cheap rivals.
The real beauty is that not only do investors have the potential for some serious capital gains over the long haul, many of the top agriculture stocks are dividend stalwarts in their own right and have continue to churn-out dividends in the recent downturn.
A prime example of this could be Mosaic (MOS). The firm produces 12% of the world’s potash and 13% of the world’s phosphates. These fertilizers are critical soil nutrients. The unfortunate thing for MOS is that prices for them have plunged over the last year. As has MOS’s stock price. But that 44% plunge now gives investors a juicy 3.95% yield, a low payout ratio and long term dividend growth at a cheap price.
The same could be said about cross-border fertilizer rival Agrium Liquid error: internal. Albeit, the drop in price has not as dramatic, investors are able to pick-up a 4.08% dividend yield and similar low payout ratio. The key for AGU stock was that Nitrogen prices haven’t collapsed as much.
Finally, an interesting buy could be John Deere (DE ). Deere has just been obliterated in the wake of China’s slowdown. However, the maker of tractors and construction equipment has been focusing on innovation to win the day. New products, driverless tractors and sensors that tackle items such as soil moisture levels are designed to help farmer save time and money. These higher margined items should help DE continue on its history of dividend growth, even though China is buying less equipment. DE yields 2.88%.
The rise in M&A activity in the agriculture sector could be letting investors know that values are to be had. The sector is certainly beat-up enough. But for those investors willing to do some digging, there’s plenty of dividends to be had. The previous picks—along with Archer Daniels Midland (ADM ) —are just some of the dividend paying bargains in the sector.