NEW YORK (TheStreet) -- Monsanto (MON) is best known for its famous (infamous, perhaps) Roundup weed-killing product. In addition to agricultural products, Monsanto also sells genetically modified seeds, the most popular of which are corn and soybeans. These days, the company is in the news because of its attempts to woo rival Syngenta. While farmers continue to buy the company's products, and we continue to eat the results, is this stock a good addition for your portfolio?
Monsanto was founded in 1901 and has grown to become one of the largest agricultural companies in the world. The company is a member of the exclusive Dividend Achievers Index -- which consists only of stocks with 10 or more consecutive years of dividend increases. Monsanto has paid increasing dividends each years since 2000.
Monsanto's 15 year history of dividend increases shows the company is committed to returning earnings to shareholders. Is the company a dividend buy, or is Monsanto drawing too much ire from its genetically modified crops? This article examines Monsanto for dividend investors.
Monsanto's business model revolves around helping farmers improve crop yields. The company accomplishes this by selling herbicides and pesticides like its flagship Roundup brand.
The company sells a complete system to farmers consisting of Roundup herbicide and herbicide resistant genetically modified seeds. Monsanto operates in two primary segments: seeds and genomics, and agricultural productivity. The seeds and genomics segment generated 56% of revenue for the company in its most recent quarter. The agricultural productivity segment generated the remaining 44% of sales.
The seeds and genomics segment is the larger of the two segments. The segment is further divided into five divisions. Each division is shown below, along with the percentage of total revenue it generated for Monsanto in the company's most recent quarter:
- Corn seed and traits: 32% of total sales
- Soybean seed and traits: 14% of total sales
- Cotton seed and traits: 3% of total sales
- Vegetable seeds: 5% of total sales
- All other crop seeds & traits: 2% of total sales
Do Genetically Modified Seeds Really Increase Crop Yields?
The ultimate purpose of Monsanto's business model is to increase crop yields. If the company's products do not increase crop yields for farmers, there is no point in buying the company's seeds and herbicides.
Farmers want to best utilize their land. Like any other business owner, they are interested in realizing the most long-term profit possible. Monsanto has generated nearly $15 billion in sales in the last 12 months. One wonders why farmers would spend a collective $15 billion on products that are costly but do not increase yields?
The debate about GMO versus non-GMO crops is ongoing. On the one hand, more people can be fed with GMO crops for less money. On the other hand, many people are uncomfortable eating genetically modified organisms.
The beauty of free markets is that consumers get to choose. Those who prefer non-GMO foods can eat them, while those looking to spend less on food can buy less expensive genetically modified foods. The success of both Wal-Mart (WMT) neighborhood markets and Whole Foods (WFM) show there's plenty of consumers around to support both GMO and non-GMO foods.
Monsanto's Strong Competitive Advantage
Monsanto has managed to raise its dividend payments for 15 consecutive years and grow to a market cap of $54 billion thanks to the company's strong competitive advantage.
Monsanto's competitive advantage is its well-funded research and development department. The company's herbicide and insect resistant seeds are the fruits of the company's large research and development expenditures.
In each of the last three fiscal years, Monsanto has spent over $1.5 billion on research and development. The company profits when it develops new better-yielding seeds and more effective herbicides.
Monsanto's Future Growth Prospects
Monsanto's management plans to double earnings-per-share by 2019. Rapid growth is not a new phenomenon for Monsanto shareholders.
Over the last decade, the company has compounded earnings-per-share at 19.4% a year. Most of this growth came in the first half of the last 10 years, however. The company's earnings-per-share have grown at just 3.3% a year since 2009.
Monsanto's plan to return to rapid growth centers around new product launches. The company has seen strong demand this year for INTACTA soybeans as well as for Bollgard II Xtend Flex cotton.
2016 should also be a strong year for Monsanto as the company releases its Roundup Ready 2 Xtend soybeans.
Monsanto is projecting 11% earnings-per-share growth for fiscal 2015. The company's expected double-digit growth this year is impressive considering the negative trends Monsanto is facing. Low crop prices have reduced farmer profits which in turn reduces Monsanto's revenue and earnings. When crop prices rise, the company will likely see even faster growth.
Monsanto's earnings are more correlated with crop prices -- especially soybeans and corn -- than with the overall economy. This makes Monsanto resistant to recessions. The company performed especially well during the Great Recession of 2007 to 2009. Each year from 2007 to 2009, Monsanto posted record earnings-per-share.
Dividend Analysis & Valuation
Monsanto currently has a dividend yield of 1.7%. This is below the S&P 500's dividend yield of 1.9%. Monsanto has a payout ratio of just 40%. The company's conservative payout ratio makes future dividend increases very likely for Monsanto.
Monsanto is currently trading for a forward price-to-earnings multiple of 17. The company is certainly not overvalued, but neither is it drastically undervalued. Monsanto appears to be trading around fair value at this time.
Monsanto's solid growth prospects but below average yield make the stock more suitable for dividend growth investors with a long time-horizon than for investors looking for current income.
The company should appeal to investors looking for exposure to the agricultural industry. In the long run, crop yields must increase to feed the growing global population. Long-term investors in Monsanto will benefit from this trend.