2023-05-06 02:53:17 ET
Summary
- In this article, I discuss Bunge, one of the world's largest agriculture companies with a great dividend track record.
- The company had a good first quarter, which underlined its ability to generate value for shareholders.
- Shares are attractively valued, providing a suitable entry for dividend-focused investors looking for inflation protection.
Introduction
Agriculture investments are a great way to protect one's portfolio against inflation. One of these companies is Bunge Ltd ( BG ) , which has done very well after bottoming in early 2020. BG stock yields 2.8% and is a big beneficiary of high agriculture-related demand growth and pricing power.
However, after the inflation peak of 2022, BG shares have lost momentum, falling roughly 24% from their 52-week highs.
FINVIZ
In this article, I want to focus again on this agriculture giant, especially from the perspective of a dividend (growth) investor.
I will use the company's just-released earnings and comments, which tell us a lot about the company and the agriculture industry in general.
So, let's get to it!
What's BG?
Bunge is an agriculture company headquartered in Missouri. The company is involved in the production, processing, and marketing of agricultural commodities, such as soybeans, wheat, corn, and sugar. It also produces a range of food products, including vegetable oils, margarine, mayonnaise, and bakery products.
According to the company , it is a leading:
- global oilseed processor and producer of vegetable oils and protein meals based on processing capacity;
- global grain processor, based on volume;
- seller of packaged plant-based oils worldwide, based on sales;
- producer and seller of wheat flour, bakery mixes, and corn-based products in North and South America, based on volume.
This means that the company is dependent on margins, as it buys agricultural products and turns these into value-added products. This gives the company pricing power, as it is technically a low-margin business.
However, being a low-margin business isn't a huge issue, especially not if this comes with a wide moat. The company's largest competitor is Archer-Daniels-Midland ( ADM ) and a number of private companies that dominate the global food trade, like Cargill.
BG Dividends
2.8% isn't a high yield. It's not something that gets income-seeking investors very excited. I also doubt that it gets growth investors excited, as agriculture isn't the place to find a lot of growth - generally speaking.
When looking at the company's Seeking Alpha dividend scorecard, we find that BG scores high on both dividend growth and yield, with satisfying scores when it comes to dividend safety and consistency. Please note that these grades are relative to the consumer staples sector.
Here are some numbers to support this table.
- BG yields 2.8% . The sector median is 2.5%.
- BG has a dividend payout ratio of 19% . The sector median is 48%.
- BG's 10Y dividend CAGR is 8.5% . The sector median is 6.3%.
- While BG does not have a history of uninterrupted annual dividend growth, it hasn't cut its dividend once.
Moreover, BG has outperformed the market by a wide margin since the early 2000s.
However, while BG has outperformed the market, it has only provided outperforming returns for investors who bought in the early 2000s. The lower part of the chart above displays the ratio between Bunge and the S&P 500 (including dividends). BG has UNDERperformed the market between the Great Financial Crisis and 2021. Inflation in 2021 caused BG to outperform the market.
Hence, it's important to be aware of the kind of stock we're dealing with here. BG might be fun for now, but it's a stock that quickly turns into a (dividend-paying) pet rock the moment inflation enters a prolonged downtrend.
This brings me to its recent earnings, which revealed a lot about the current state of agriculture.
What Recent Developments Tell Us About BG
While inflation has peaked, BG continues to shine. In 1Q23, the company generated $15.3 billion in sales, beating estimates by $150 million. While revenue was down 3.5% year-on-year, there is no structural weakness visible.
Adjusted EPS fell from $4.26 to $3.26, which was $0.02 higher than expected.
The lower earnings were due to lower soy crush results (margins) in processing and lower South American origination margins in milling, offsetting improvements in North America and Brazil.
In the merchandising industry, the company also experienced lower results in the quarter as margins declined from the previous year, which had been impacted by market disruptions caused by tight supplies and the war in Ukraine. However, refined and specialty oils had a strong start to the year, with all regions performing well. Notably, North America and South America saw significant year-over-year improvements due to strong demand for food and renewable fuels, as well as the effective use of the company's distribution network.
Furthermore, Bunge Ventures helped improve corporate expenses, although noncore sugar and bioenergy joint ventures had lower results due to lower Brazilian ethanol prices and higher costs.
In light of these macro developments, the company made strategic investments in its growth areas, including core origination and crush operations, expanding refined and specialty oil products, and increasing participation in renewable feedstocks and plant-based proteins.
According to CEO Greg Heckman , investments in origination and crush operations are already showing results, with improvements in maintenance and reliability processes reducing overall unplanned downtime to a record low for the company. The company's energy reduction projects are also showing strong results, and it put through record volumes in its ports in Brazil by adjusting its product mix to improve efficiency.
These are just incremental improvements. However, even small improvements add up over time. After all, BG is a very low-margin business. Even small operating improvements tend to have major long-term impacts on the bottom line.
Bunge has also been investing in innovation and technologies that support low-carbon initiatives, increasing its participation in renewable feedstocks and collaborating with Chevron (CVX) and Corteva Agriscience to introduce proprietary winter canola hybrids to produce plant-based oils with lower carbon profiles. This creates new revenue opportunities for farmers with a sustainable crop rotation.
And speaking of Corteva, the company has partnered with Bunge to develop and commercialize soybean varieties that create new value for soybean farmers and feed customers. The protein meal from these varieties is expected to reduce the use of synthetic additives, lower costs, and shrink their carbon footprint.
What All Of This Means For Shareholders
After allocating $86 million for sustaining capital expenditures and investing $87 million in growth and productivity capital expenditures, Bunge had $360 million of retained cash flow. They paid $94 million in common dividends but did not repurchase shares during the quarter. According to the company:
As we have discussed previously, we have a balanced approach to capital allocation and share repurchases are absolutely a component of that mix. However, they have been on hold over the last 2 quarters as we've been actively engaged in a variety of discussions to expand our global platform, scale and core capabilities.
While that may have come as a bit of a disappointment to some, the company will soon go back to buying its own shares. After all, it believes BG shares are undervalued.
We believe our stock is undervalued and look forward to getting back in the market to continue our share repurchase program as soon as possible.
Buybacks are also supported by a healthy balance sheet. Bunge has a BBB-rated balance sheet, which comes with high marketable inventories (RMIs). Essentially, the company's inventories consist of agriculture products like crops, which are high-value commodities that can (technically speaking) be sold at any given time against market prices. It cannot be compared to the inventory of, let's say, a consumer goods or manufacturing company.
Bunge's RMIs exceeded its net debt by approximately $4.5 billion at the end of the first quarter. This was achieved through the use of retained cash flow and proceeds from portfolio actions to fund working capital while reducing debt. The company's liquidity position was also solid, with all $5.7 billion of its committed credit facilities unused and available at the end of the quarter.
Adding to that and using these numbers, the company has a net leverage ratio of less than 0.1x EBITDA.
Furthermore, the company's adjusted ROIC (that's the return on invested capital) for the trailing 12 months was 19.8%, well above its RMI adjusted weighted average cost of capital of 7.7%. ROIC was 14.4%, also above its weighted average cost of capital of 7%. While the company had an unusually large cash balance of approximately $3 billion at the end of the quarter, most of it was expected to be used for repayment of upcoming debt maturities and increased working capital during the second quarter.
While I'm taking a bit of a risk here, I expect the company to have an A-rated balance sheet within 24 months.
Valuation
BG shares are trading at 5.6x NTM EBITDA, which is low. Painting with a broad brush, BG usually trades close to 8x EBITDA, which means I'm sticking to what I said in my last article . I believe that BG shares are roughly 30% undervalued.
A 30% upside would imply $117 per share. The current consensus target is $126. The latest target was from BMO Capital Markets (Outperform, PT $120).
Takeaway
In this article, we discussed Bunge, one of the biggest and most conservative agriculture stocks on the market.
While its 2.8% yield isn't something to write home about, it's backed by a business model with a wide moat, a fortress balance sheet, and a history of steady and significant dividend growth.
I also like the valuation at current levels, although it's impossible to make the case that agriculture stocks have bottomed. Recession fears remain a huge factor in this market.
Hence, investors looking to buy a strong dividend stock with inflation protection characteristics may benefit from gradually buying BG shares.
If I were in the market for BG (I have other commodity plays), I would buy in steps to somewhat manage general market turmoil.
For further details see:
Bunge: Attractive Agriculture Dividends