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How to find growth in farm stocks

The trade war with China has hurt America’s farmers, but solid investments are still sprouting.

  • By Lou Carlozo,
  • U.S. News & World Report
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For investors betting on the agriculture sector, the crop seems split between seeds of growth and seeds of doubt. With the Trump administration sticking to its trade war with China, it's hardly a secret that America's farmers have been hit – hard.

To date, the Chinese have tariffed more than 600 products, many produced by America's farmers. Cotton, wheat, dairy, wine, fruits, nuts, soybeans and pork make up just a part of the list – with soybean prices hitting a 10-year low last summer, since China until recently bought 60 percent of what the U.S. agriculture industry produces.

Thus China, once America's second largest market, could drop to fifth this year, predicts the American Farm Bureau Federation. And if things keep up, a series of dominoes could fall: less demand for exports leading to slumping sales for farm equipment manufacturers, less need for fertilizers and unpredictable supply chains for food-related industries. So is it time to stay put? Time to panic? Or time to invest in what Farmer Bob himself might call the low-hanging fruit? Experts say that for now at least, these kind of decisions (except for the panic part) should be taken on a case-by-case basis.

Take Archer Daniels Midland Co. (ADM), which for the last months has held its own, rising 1 percent to $43 per share. While that's no bumper crop to speak of, it does include a mini-rally of about 8 percent since Christmas.

"Counting on dividends from ADM seems like a good bet," says Robert Johnson, a finance professor at Creighton University's Heider College of Business.

The Chicago-based company – which procures, transports, stores, processes, and merchandises agricultural commodities – has a healthy track record dividend-wise.

"The firm's payout ratio is 44.7 percent and dividend growth has been steady, as ADM has increased dividends for each of the last 25 years," Johnson says. "The 10-year compound annual dividend growth rate is 10.1 percent." The stock is also liked by many Wall Street analyst firms; four rate it a "strong buy" and 6 a "hold," with none advising to sell.

Then there is Toro Co. (TTC), which makes water-saving irrigation system supplies for farm fields. The Bloomington, Minnesota, company earns a top dividend rating based on the DIVCON scoring system used by Blockforce Capital, an asset management firm based in San Diego.

While the yield comes in at just 1.3 percent, "Toro exhibits strong dividend growth potential over the next 12 months," says Kian Salehizadeh, a senior Analyst at Blockforce.

Included in three of Blockforce's portfolios, "Toro has plenty of levered free cash flow, strong earnings growth and money that can be reallocated from buybacks toward future dividend growth." Right now that quarterly dividend sits at 22.5 cents per share, already up 12.5 percent from 2018 and 25 percent since 2016.

What's more, Toro's stock has spiked in 2019, up more than 23 percent for the year to about $69 per share. One factor that potentially helps Toro is that agriculture represents just one part of its customer base; it also manufactures turf maintenance and snow removal equipment.

On the insecticide and herbicide side, Philadelphia-based FMC Corp. (FMC) gets high marks for its dividend rate of $1.60 per share. The agricultural sciences company has also seen a rally in 2019, up 17 percent to roughly $77 per share. It's up by that same percentage year over year.

FMC also has good future prospects due to the fact that it does business worldwide, says K.C. Ma, director of the Roland George Investments Program at Stetson University in DeLand, Florida.

"From well-diversified sources of revenue and profit worldwide, the stock is expected to deliver 20 percent annual return over the next five years," Ma says. "The company is transforming into a generator of free cash flow to be returned as dividends and massive stock buybacks."

And where tariffs might put a damper on things, investors might celebrate, oddly enough, a spell of bad weather. Teucrium Trading, which tracks the movement of agricultural commodities through its exchange-traded funds, forecasts this weather-related scenario: corn prices could as much as double, based on two historical precedents over the last 12 years.

"History clearly shows us that corn sits around its cost of production, sometimes for lengthy periods (like now), until it is propelled higher by a weather event," says Teucrium CEO Sal Gilbertie.

Put another way, never has the prospect of drought – at least for investors – promised such a bumper crop.

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