Archer Daniels Midland Company (ADM) has always maintained a disciplined capital allocation strategy, focused on making investments to develop its business, while using the excess cash to enhance shareholder returns through dividend payouts and share buybacks.
In an attempt to maintain its balanced capital allocation structure, improve returns and augment economic value added (“EVA”), the company announced a host of strategies yesterday and also outlined the key areas where it plans to focus to control its operations better.
Firstly, Archer Daniels declared that it will plough back nearly 30%–40% of its future cash flow from operations in value-generating projects, with the remaining share allocated toward undertaking strategic plans like mergers, acquisitions, dividend payouts and share repurchases.
Going by this plan, the company announced a hike in its dividend payout ratio, from a historic band of 20%–25% of earnings to a range of 30%–40% over the medium term. Also, Archer Daniels reaffirmed its target of achieving 10% as adjusted return on invested capital, being 200 basis points above the long-term weighted average cost of capital of 8%.
Further, the global food processing company made a few announcements related to its operating segments, with an aim of strengthening its foothold in the industry where it operates. Given a strong EVA growth potential, the company plans to expand operations of all its segments globally.
The Oilseeds Processing segment is on track to grow operations in the Brazilian northern frontier to cater to its growing demand. Here management forecasts the growth rate of soybean production to be maintained at 20% through 2017.
Operations at the Corn Processing segment are likely to gain support from the growing ethanol business and the recent introduction of a sweetener facility. Additionally, the Agricultural Services segment has the opportunity to witness a threefold rise in its margin-per-ton in the distribution channel.
Moreover, the company’s most recently formed segment, WILD Flavors and Specialty Ingredients is anticipated to grow sales to $10 billion from $2.5 billion. The company continues to expect this segment to generate revenue and cost synergies worth nearly $125 million in three years. Also, the company’s Research and Development initiatives are expected to yield additional cost savings of roughly $350 million by 2019.
Finally, Archer Daniels stated that it focuses on improving its core business by enhancing its product mix, efficient portfolio management and increased marketing. It also aims to boost operational efficacies by achieving technological leverage, which is likely to enrich productivity. Lastly, the company intends to remain committed to strategic expansion and innovations.
With all these actions underway, this Zacks Rank #3 (Hold) company is most likely to be well placed in this competitive industry, exploit all possible opportunities arising with changing trends, drive further growth and achieve its balanced capital allocation goal.
Better-ranked stocks in the consumer staples sector include Pilgrim's Pride Corp. (PPC), WD-40 Company (WDFC) and Carriage Services Inc. (CSV), each carrying a Zacks Rank #1 (Strong Buy).
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