Here's a hidden gem for those of you looking for bargains in his crazy market. 

This agricultural company is trading at a price-to-earnings ratio of just 11.2. Its historical average price-to-earnings ratio over the last decade is 13.5. It's a cyclical company and right now its earnings are depressed at $2.88 per share. Under "normal" conditions, this company's earnings-per-share would be around $3.50. At its normal earnings level and its normal price-to-earnings ratio, this stock would trade for $47 per share.

Right now it is trading for just $32.58 -- implying 44% upside at current prices.

What's more, this stock has paid rising dividends every year for 40 consecutive years and just announced another dividend increase. This company's long dividend streak makes it one of only 50 Dividend Aristocrats. In addition this stock is offering investors a well above average 3.5% dividend yield. The company has compounded earnings-per-share at over 13% a year over the last decade and is a favorite of The 8 Rules of Dividend Investing.

The agricultural powerhouse trading at a deep discount is Archer-Daniels-Midland (ADM - Get Report) .

ADM Chart ADM data by YCharts

Archer-Daniels-Midland was founded in 1902 and now employs over 33,000 people in 140 countries.

It is rare for such a well-known stock to become undervalued, but the current macro environment has caused just such an undervaluation to occur.

The strong dollar has reduced United States agricultural exports, while low oil prices make ethanol less economical. Both of which have temporarily depressed Archer-Daniels-Midland's earnings.

Despite an unforgiving macro environment, Archer-Daniels-Midland continues to be highly profitable. The company realized earnings-per-share of $0.61 in its most recent quarter. Archer-Daniels-Midland announced a 7% dividend increase to $0.30 per quarter in its latest earnings release.

Even with depressed earnings, the company's payout ratio is around a conservative 50%. A company cannot pay rising dividends for 40 consecutive years without having a strong competitive advantage.

Archer-Daniels-Midland's competitive advantage comes from its excellent global distribution network. The company owns the following:

  • 283 processing plants
  • 413 procurement facilities
  • About 250 warehouses

In addition to these facilities, the company also has a large fleet of rail cars, trucks, and ocean vessels for transportation. It would take an enormous upfront capital investment for a competitor to come close to matching the scale and distribution network of Archer-Daniels-Midland.

The company's competitive advantage helps insulate it from recessions. Instead, Archer-Daniels-Midland is sensitive to oil prices (due to its ethanol production), grain prices, and a strong United States dollar.

While the company's earnings are both volatile and cyclical, Archer-Daniels-Midland has a place in a well-diversified dividend growth portfolio because it is not susceptible to recessions like most stocks. Archer-Daniels-Midland saw earnings-per-share rise each year through the Great Recession as demand for ethanol increased.

Growth Prospects

Archer-Daniels-Midland has compounded its earnings-per-share at 13.6% from 1999 through 2015.

Shareholders of the company's stock should expect total returns over the long run not counting valuation gains of 10.5% to 13.5% a year from the stock's 3.5% dividend yield and expected 7% to 10% a year earnings-per-share growth.

The long-term growth driver for Archer-Daniels-Midland is increased food consumption from growing global populations.

In the near-term, Archer-Daniels-Midland's management is shedding low margin cyclical businesses and acquiring higher margin stable businesses to boost profitability.

Recent acquisitions include: WILD Flavors (flavorings and additives) and Harvest Innovations (Non-GMO, organic, and gluten-free ingredients).

The company has a large margin of safety, solid long-term growth prospects, and a shareholder friendly management. Archer-Daniels-Midland is a bargain at current prices for investors looking for above-average dividend income and high total returns.

 

This article is commentary by an independent contributor. At the time of publication, the author is long ADM.