Anticipating increased profits in 2014 as well as strong operating cash flows Archer Daniels Midland Company (ADM) increased its quarterly dividend by 26% to 24 cents per share from its earlier payout of 19 cents. As a result of this revision, the company’s annualized dividend stands at 96 cents per share. The higher dividends form part of the company’s target to return $1.4 billion to shareholders via dividends and buying back 18 million shares out of 2014 profits and cash flows.
The new dividend, which is the 329th successive quarterly payout, will be paid on Mar 13, 2014, to stockholders of record as of Feb 20, 2014. The dividend yield based on the new payout and the last closing market price is approximately 2.4%.
Archer Daniels has been increasing dividend every year since 2002. Starting from 5 cents in 2000, the quarterly dividend payout has now increased nearly five times to the current level of 24 cents. The current dividend hike comes after 4 quarters. The last dividend hike from 17.5 cents to 19 cents was announced on Feb 6, 2013. Historically, Archer Daniels has paid out roughly 20% to 25% of its earnings to shareholders, but now it wants to increase its range to 25%–30%.
Apart from raising dividend, the company’s board of directors has decided to enhance shareholders’ wealth through share repurchases. Archer Daniels intends to buy back 18 million of its common shares by the end of 2014, which are worth nearly $725 million at current market price.
The company’s strategy of paying regular dividend and increasing the same at feasible intervals reflects its commitment to enhance long-term value for shareholders. Through this Archer Daniels also depicts its ability to boost earnings and cash flows in the long run.
This global food-processing and commodities-trading company also announced that it will invest around $1.4 billion in capital projects in 2014, out of which most will be outside the U.S. in high growth markets.
In its last earnings announcement, Archer Daniels declared cash flow of $4,869 million from operational activities. Furthermore, Archer Daniels ended third-quarter 2013 with $3,252 million in cash and cash equivalents compared with $1,235 million at the end of the prior-year quarter. Moreover, in the first three quarters of 2013, the company repurchased stock worth $95 million and paid dividends worth $376 million.
Dividend hikes and share repurchase programs are frequent among companies with a stable cash position and healthy cash flow. Apart from Archer Daniels, many other firms have raised their quarterly dividends in the recent past. These include Snap-on Inc. (SNA), Fortune Brands Home & Security, Inc. (FBHS) and Sysco Corporation (SYY) that raised their dividends by 15.8% to 44 cents, 20% to 12 cents and 3.6% to 29 cents, respectively.
We believe that dividend payouts not only enhance shareholder return but lead to the stock’s price appreciation as well. Moreover, such a measure enables companies to bolster investors’ confidence, persuading them to either buy or hold the scrip instead of selling it. Looking ahead, Archer Daniels remains confident of its growth potential, raising hopes for further enhancement of shareholder value through dividend payments.
Archer Daniels’ declaration of its increased dividend boosted investors’ confidence, as was reflected in the company’s share price that rose nearly 2.6% to $41.38 during yesterday’s trading hours before closing at $40.66.
Currently, Archer Daniels carries a Zacks Rank #3 (Hold).
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