Sunday, January 11

Week 184 - Barron’s 500 List: Production Agriculture Companies

Situation: Agriculture stocks potentially offer investors above-average rewards, given that 1) food is an “essential good” and 2) middle-class consumers in Asia continue to grow in numbers and demand more protein in their diets. Companies that supply farmers with equipment, seeds, insecticides, feed, and fertilizer depend on the weather cycle and population growth for their pricing power, instead of the economic cycle. Valuations on those production agriculture companies tend to track farmland values, which have been growing 14-15%/yr for the past 14 yrs vs. 4-5%/yr for the S&P 500 Index with dividends reinvested.

The problem for investors is that there are many Production Agriculture companies and most are in the mid-cap range or have less-than-investment-grade credit ratings. For this week’s blog, we’ll stick to analyzing those that appear on the Barron’s 500 List with S&P investment-grade bond ratings and S&P stock ratings of at least B+/H.

That leaves only 9 companies (see Table). Some have P/E values higher than the S&P 500 Index, which has been hovering around 20. To see whether this should be a concern, we looked at each company’s Enterprise Value relative to Operating Earnings, i.e., EV/EBITDA (see Column K in the Table). Any value over 13 suggests that the stock is overpriced. None fell into that category.

Bottom Line: We’ve come up with 9 Production Agriculture stocks that are appropriate for inclusion in a retirement portfolio. When you pick one or two to accumulate over time with dollar-cost averaging, you’ll receive dividend cheques in retirement that are likely to grow twice as fast as inflation (see Column H in the Table).

Risk Rating: 7

Full Disclosure: I own shares of MON, DE, CF, CMI, HRL, and DD.

NOTE: Metrics in the Table are current as of the Sunday of publication; red highlights denote underperformance relative to our benchmark, the Vanguard Balanced Index Fund.

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