Monsanto Can Help Your Portfolio Grow

Some Dark Clouds

Monsanto is not without its risks. Despite the refreshing focus and pragmatism of new CEO Hugh Grant, Monsanto is still associated with a number of controversies. Solutia, which Monsanto spun off in 1997, filed for bankruptcy last year, which could expose Monsanto to some pension and health care liabilities related to certain Solutia employees.

The company is also dealing with litigation involving Delta and Pine Land (DLP), which it unsuccessfully attempted to acquire in 1998. Finally, there probably will be no shortage of headline risk associated with public concern over GMO seeds, especially in Europe. Monsanto did receive some good news on this front in March, though: The European Union safety authority declared Monsanto's Roundup Ready canola safe for human consumption. Then, last month, the EU effectively lifted its ban on GMO foods by approving a modified strain of corn. Monsanto has 11 of the 22 GMO products that are pending approval in the EU.

These risks seem manageable in light of Monsanto's strong cash flow and sturdy balance sheet. Monsanto's debt-to-capital ratio is just 24%. And the company is expected to produce $350 million to $400 million in free cash flow before dividends ($230 million after) in fiscal 2004, marking the fourth straight year that free cash flow has been solidly above $200 million. Free cash flow is likely to be used for share repurchases. The stock also pays a dividend, with a current yield of 1.7%.

Monsanto isn't your typical biotech stock. But its promising pipeline, solid earnings, strong cash flow and relatively attractive valuation make it worth considering.

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