Certain sectors of the market are ideal for creating high dividend stocks. This could be because demand is steady, margins are high, or there is a lot of growth in the sector. Examples include utilities, consumer staples companies, and agricultural stocks, three of which we will review here.
Great Scotts! (Miracle-Gro)
Founded in 1868, Scotts Miracle-Gro (SMG) is a worldwide manufacturer and distributor of a variety of lawn and garden care products, as well as indoor and outdoor planting products. Scotts has three segments: US Consumer, Hawthorne and others. Through these segments, Scotts provides a wide variety of products such as its famous lawn and grass care lines, fertilizers, weed control, pest control, plant food, and certain hardware closely related to its core products, such as spreaders. Scotts has many of the most recognized brands in the space, including Earthgro, Ortho, Miracle-Gro, Roundup, and of course, Scotts.
The company should generate about $4 billion in total revenue this year, and trade with a market cap of $2.8 billion after massive sales so far in 2022.
Scotts has built an enviable portfolio of consumable agricultural products that tend to be in higher demand over time. This is true for the company’s portfolio of lawn care products aimed at consumers, but in addition, Scotts has a variety of products for growers who demand higher yields from their crops. The massive tailwind that Scotts has seen from cannabis growers over the past few years has abated, and we think this year’s much lower earnings base could give the company strong 7% earnings per share growth going forward. .
Scotts has also managed to increase its dividend for 12 consecutive years, which is quite good in a sector as cyclical as agricultural products. Moreover, the average dividend increase over the past decade has been around 8%, so the company is serious about returning cash to shareholders. The payout ratio, despite all this growth, is still just over half of earnings, and given the 7% earnings growth we forecast, we see many more years of dividend increases ahead for Scotts.
The dividend yield is now as high as 5.2%, which is about three times the S&P 500, and a yield usually reserved for real estate stocks. With the yield as high as it is, as well as the relative safety of the payout, we see Scotts as a great dividend stock today.
The stock is also trading at just 11 times this year’s earnings estimate, which is well below our fair value estimate of 15 times earnings. That could provide shareholders with a mid-single-digit tailwind in the coming years from a rising valuation. With all these factors combined, we see more than 16% total annual returns for Scotts in the coming years.
Up And ADM!
Founded 120 years ago, Archer-Daniels-Midland (ADM) is a commodities giant that supplies, transports, stores, processes and distributes agricultural products worldwide. There are three sections: At Services and Oilseeds, Carbohydrate Solutions, and Nutrition. Through these segments, Archer produces, stores, moves and distributes a wide variety of agricultural commodities, including corn, wheat, oats, barley, oilseeds, sweeteners, vegetable oils, animal feeds, and more.
The company should produce about $98 billion in revenue this year, and has a current market cap of $48 billion.
Archer has grown in popularity over the years, due to its sheer size and scale. The company is a dominant player in the agricultural commodities business in the US, and given the demand for food-related commodities in particular, we see the company’s business model as attractive enough to produce dividends over time. That helped the company raise its dividend for 47 consecutive years, making it a rare company not only among agricultural stocks, but in any market sector. What’s more, the company’s average growth over the past decade has been close to 9%, meaning Archer gets high marks for both longevity and growth.
We see 5% earnings growth going forward, and the current payout ratio is only a quarter of this year’s earnings, meaning Archer’s dividend is extremely safe, but also has a very long runway for growth in the future ahead of him. The current yield is only 1.9%, but that’s still about 30 basis points ahead of the S&P 500, and Archer has significantly better dividend growth prospects than the broader market.
We estimate a fair value at 14 times earnings, and shares are just under 13 times today, indicating a slight headwind from the valuation. Coupled with 5% earnings growth and 1.9% yield, we forecast 8%+ total returns in the coming years.
Our ultimate stock is Bunge Limited (BG), which operates as an agricultural and food company worldwide. The company has four segments: Agribusiness, Refined and Specialty Oils, Milling, and Sugar and Bioenergy. Through these segments the company offers a wide range of products, including oilseeds, grains, protein meals, bulk oils and fats, flours, cornmeal, and more.
The company was founded in 1818, and in the two hundred years since its founding it has grown to approximately $69 billion in annual revenue, and a market cap of $13.6 billion.
Like Archer, Bunge’s highly diversified agricultural commodities business lends itself to consistency. Bunge has a long list of commodities in its portfolio that cover a wide range of uses, and over time, the demand for these commodities continues to grow. There are cyclical periods, of course, but we believe the company’s dividend prospects are bright.
The current dividend increase streak is only two years, but that’s why Bunge put its dividend hikes on hold during the pandemic. There was never a cut, but a year went by without an increase. However, over the past decade the dividend has averaged a growth rate of 9% per year despite this hiatus, so Bunge is considered a strong dividend growth stock despite its modest streak.
Bunge’s current earnings are elevated by historical standards, so we see a slight earnings contraction in the coming years. However, earnings per share rose from $1.75 in 2019 to $13.64 last year, so the very high base means that a small contraction is far from a problem.
That also means the payout ratio is only 21% on this year’s earnings, so we see the dividend as very safe, with plenty of room for future growth. The current yield is also respectable at 2.8%, so it’s a well-rounded dividend stock.
We see a fair value at 10.5-times earnings, and today, shares trade for just over 7-times. That could create a significant tailwind, and in tandem with earnings contraction and the yield, we expect around 8% total annual returns over the next few years.
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