Week 225 - How are the 20 Largest AgriBusiness Companies Doing?

Situation: Commodities have fallen steadily in value since the Lehman Panic. A recent further decline is related to a slowing in the pace of modernization in China, where 40% of commodity production had gone for the past 20 yrs. This has greatly compounded the problem because the rapid pace of modernization there had required remarkable growth in the production of all commodities. Now that China’s infrastructure buildout is largely complete, those upgraded mining and exploration assets in Australia, Brazil, Chile, and South Africa have been idled, and over a dozen billion dollar projects have been aborted. But those aren’t the only commodities out there. What about agricultural products? Demand for soybeans and cereal grains (e.g. barley, corn, oats, rice, rye, wheat, sorghum) is different because close to 20 million people emerge from poverty each year and are able to afford better food, which translates into a protein intake of at least 60 gm/d. The volumes of food involved in meeting that increased demand make it necessary to combine the “green revolution” with “factory farms.” That combination has come to be called “AgriBusiness.” AgriBusiness is focused on efficiently getting water to soil that has been prepared to support the germination of designer seeds through “agronomy.” Agronomy is shorthand for the scientific use of fertilizers, insecticides, and fungicides to optimize plant growth around weather patterns and irrigation systems that meet water needs.  

Mission: Assemble data on stocks representing the 20 largest AgriBusiness companies, and compare their aggregate performance with broad commodity indices--as well as narrower indices that reflect the performance of farming, mining, and energy companies.

Execution: AgriBusiness companies are high risk investments, and each has only a small piece of the pie. In order to compete against one another, each has to maintain a market for its goods and services in dozens of countries. Only 4 of the 20 identified AgriBusinesses are stable enough to warrant inclusion in a retirement portfolio by even the most basic criteria (see Table). These criteria are 1) Dividend Achiever status, 2) an S&P bond rating of at least BBB+, and 3) an S&P stock rating of at least B+/M. The 4 companies that make the cut are: Monsanto (MON), Deere (DE), Hormel Foods (HRL), and Archer Daniels Midland (ADM).

Bottom Line: If you think your portfolio requires exposure to commodities, then you’re in for a rough ride. But “long cycle” investments such as commodities can be quite rewarding if held for two or more market cycles. The safest approach is to own stock in a few of the larger AgriBusiness companies, as opposed to owning stock in mining or energy companies (see Week 221). This week’s blog takes a closer look at those agricultural producers. Be aware, however, that overproduction to meet China’s needs over the past decade has expanded agricultural production capacity along with that for oil, natural gas, coal, iron ore, bauxite, and copper. This is being reversed now that China’s “buildout” has begun to plateau.  

Risk Rating: 8

Full Disclosure: I own stock in CF, HRL, MON, DD, DE, and ADM.

Note: Metrics in the Table that are highlighted in red denote underperformance relative to our key benchmark (VBINX); metrics are current as of the Sunday of publication.

Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com

Week 224 - Growing Perpetuity Index, v2.0

Situation: We started publishing this weekly blog over 4 years ago, believing that investors can safely profit by dollar-averaging online into stocks of strong companies. To simplify matters, we defined strong companies as those in the 65-stock Dow Jones Composite Average (^DJA) with a record of increasing their dividend each year for at least the past 10 yrs. S&P calls such companies Dividend Achievers, and there are 28 in the ^DJA. We call ^DJA the “Stockpicker’s Secret Fishing Hole” because it outperforms the S&P 500 Index (^GSPC) over two or more market cycles (compare Lines 30 and 32 in Column C of the Table) but contains only 1/8th as many stocks. 

Mission: For v1.0 of the Growing Perpetuity Index, we set up 4 criteria to find the highest quality companies in the ^DJA (see Week 4). Each selected company had to fit the following criteria:
   a) has a dividend yield that is no less than the yield for the S&P 500 Index (VFINX);
   b) is a Dividend Achiever;
   c) has an S&P stock rating of A-/M or better;
   d) has an S&P bond rating of BBB+ or better.
There were 14 companies that met our criteria. We wanted a Growing Perpetuity Index of no more than 12 stocks, so Southern Company (SO) and Caterpillar (CAT) were excluded from v1.0 (see Week 4).

Execution: In the 4 years since that blog was published, two additional companies have come to meet our criteria: Microsoft (MSFT) and a railroad, CSX (CSX). Now we’re setting up version 2.0 of the Growing Perpetuity Index to include all 16 qualifying companies (see Table).

Bottom Line: A perpetuity is a bond that never matures (i.e., it pays interest indefinitely). A growing perpetuity is a bond that pays more interest each year. Our Growing Perpetuity Index does that. It is a unique reference tool for retirement planning, a safe and effective tactic to have a source of income (quarterly dividend checks) that will grow faster than inflation (see Column H in the Table). Inflation has grown 2.1%/yr since the S&P 500 Index peaked on 9/1/00 (see Column C in the Table), but dividends for v2.0 of the Growing Perpetuity Index have grown ~5 times faster (see Line 18 under Column H). Looking at price appreciation over the past 20 yrs using the BMW Method, the aggregate of 16 stocks (see Line 18 under Column L) has appreciated 3 times faster than the S&P 500 Index (see Line 32 in the Table). All 16 companies have outperformed the S&P 500 Index over the past 20 yrs (see Column L in the Table). However, outperformance always comes with greater risk: The BMW Method’s analysis of price performance over the past 20 yrs predicts that the extent of loss for those 16 companies in a future bear market will be 10% greater than for the S&P 500 Index (compare Lines 18 and 32 in Column N of the Table).  

Risk Rating: 4

Full Disclosure: I dollar-average into JNJ, NEE, WMT, MSFT and XOM, and also own shares of MCD, IBM, KO, UTX, and MMM.

Note: Metrics highlighted in red indicate underperformance relative to our benchmark (VBINX); metrics are current for the Sunday of publication.

Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com