Company Description: Monsanto Co. is a global provider of agricultural products and integrated solutions for farmers.
Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value, see page 2 of the linked PDF for a detailed description:
1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number
MON is trading at a discount to 2.) and 3.) above. The stock is trading at a 86.6% premium to its calculated fair value of $61.64. MON did not earn any Stars in this section.
Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:
1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%
MON earned one Star in this section for 1.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. The company has paid a cash dividend to shareholders every year since 2001 and has increased its dividend payments for 13 consecutive years.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA) or Treasury bond? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
1. NPV MMA Diff.
2. Years to > MMA
The NPV MMA Diff. of the $46 is below the $2,200 target I look for in a stock that has increased dividends as long as MON has. If MON grows its dividend at 6.5% per year, it will take 10 years to equal a MMA yielding an estimated 20-year average rate of 2.98%.
Memberships and Peers: MON is a member of the S&P 500 and a member of the Broad Dividend Achievers™ Index. The company's peer group includes: The Mosaic Company (MOS) with a 2.3% yield, Potash Corp. (POT) with a 4.1% yield and Syngenta AG (SYT) with a 3.7% yield.
Conclusion: MON did not earn any Stars in the Fair Value section, earned one Star in the Dividend Analytical Data section and did not earn any Stars in the Dividend Income vs. MMA section for a total of one Star. This quantitatively ranks MON as a 1-Star Very Weak stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $43.85 before MON's NPV MMA Differential increased to the $2,200 minimum that I look for in a stock with 13 years of consecutive dividend increases. At that price the stock would yield 4.5%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $2,200 NPV MMA Differential, the calculated rate is 15.4%. This dividend growth rate is significantly higher than the 6.5% rate used in this analysis, thus providing no margin of safety. MON has a risk rating of 2.25 which classifies it as a Medium risk stock.
The company enjoys a relatively low exposure to economic cycles, consistent cash flows and owns a promising pipeline of seed products. However, the company competes in global agricultural markets, has exposure to currencies valuations, adverse weather and risks relating to intellectual property rights.
October 08, 2014 MON reported a fiscal fourth-quarter 2014 loss per share of $0.27 compared with a loss of $0.47 in the same quarter last year. For the quarter, the company generated cash of $3.1 billion from operating activities, up 11.5% from the prior-year's quarter. Capital expenditures were $1 billion vs. $0.7 billion in fiscal 2013.
With relatively low debt and a low free cash flow payout ratio, MONs dividend fundamentals are desirable. However, the stock is trading well above my calculated fair value of $61.64 and with a yield of 1.7%, it is currently not a serious contender for any of my income portfolios.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I held no position in MON (0.0% of my Dividend Growth Portfolio). See a list of all my dividend growth holdings here.
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