The agriculture sector is one of the most important sectors in more ways than one. And in turn, this makes agriculture stocks also a big deal.
With steady growth in world population, there is a critical need for investment in the agriculture sector productivity. In fact, food demand is expected to increase by 59% to 98% by fiscal year 2050.
Furthermore, the growth in the agriculture sector is two to four times more effective in raising the income among the poorest as compared to other sectors. This fact is likely to drive investments in the agriculture sector in several countries globally.
Considering these points, agricultural stocks are worth holding in your portfolio. Therefore, let’s discuss four agricultural stocks that can deliver healthy returns through stock upside and dividends.
- Deere & Company (NYSE:DE)
- Adecoagro S.A. (NYSE:AGRO)
- CF Industries Holdings (NYSE:CF)
- Bunge Limited (NYSE:BG)
So, let’s dive in.
Hot Agriculture Stocks: Deere & Company (DE)
As one of the leading providers of global agricultural equipment solutions, DE stock is worth holding in your portfolio. Before looking at the company’s growth outlook, I must mention that DE stock has a dividend payout of $3.04 per share. So as a low beta stock coupled with robust dividends, Deere & Company is worth holding for income investors.
From a business perspective, the agriculture segment in U.S. and Canada remains the growth and cash flow driver. However, Deere & Company has presence in Latin America, Asia, Africa and Middle-East, among others.In turn, these regions are potential game changers in terms of top-line growth in the next decade.
Moreover, it’s worth noting that besides the traditional agriculture equipment’s, Deere & Company is also focusing on automated farm machinery. This is another area for growth in the coming years. With the company’s research and development as a percentage of sales at 5%, I expect innovation driven growth to sustain.
DE stock does trade at a forward price-earnings ratio (P/E) of 19.6. However, I believe that valuations are not expensive considering the point that earnings are estimated to grow to $8.55 per share for the fiscal year 2021.
So, for these reasons, DE stock is one of the top agriculture stocks right now.
Adecoagro S.A. (AGRO)
Among smaller agriculture stocks out there, AGRO stock is worth considering. The stock has underperformed and has declined by 38% in the past year. However, current levels are attractive for medium to long-term exposure.
As of first quarter of 2020, Adecoagro reported 438,000 acres of area under plantation with 238,000 acres under farming plantation. The remaining 169,000 acres was under sugarcane plantation. Farming plantation includes crops like rice, wheat, soy and corn, among others. Therefore, Adecoagro is a perfect company for exposure to a wide variety of agricultural commodities.
Overall, the company’s financial performance does depend on agricultural commodity prices and weather conditions. That’s one of the risk factors. Having said that, though, Adecoagro has consistently delivered stable EBITDA in the last few years.
It’s also worth noting that as of September 2019, the market value of the company’s farmland was $766 million. That said, it’s very likely that farmland value will increase in the coming years. This provides another avenue for the company to deliver shareholder value by monetizing assets.
Furthermore, the company’s net debt as of Q1 2020 was $711 million. Therefore, considering the value of the company’s key asset, Adecoagro is not over leveraged.
Collectively, AGRO stock is an interesting play among agriculture stocks. However, this small company can be a potential outperformer in the long-term.
CF Industries Holdings (CF)
As a provider of agricultural fertilizers, CF Industries is another one of the great agriculture stocks worth considering. CF Industries distributes nitrogen fertilizers and other nitrogen products globally.
One of the reasons to like the company is robust cash flows. In the last 12 months, the company has reported $1.1 billion in free cash flows. Therefore, the current annual dividend of $1.20 per share is sustainable and likely to increase.
I also like CF stock from a valuation perspective, as the stock trades at a forward P/E of 19.1 as compared to an industry average P/E of 35.8. The stock has been depressed in the current year, but valuations suggest scope for potential breakout on the upside.
On the flipside, though, record production of soybeans in Brazil is likely to translate into low price for corn and soybean. This might impact the fertilizer sector growth in the near-term. However, valuations are attractive and dividends provide an incentive to consider exposure to CF stock.
Bunge Limited (BG)
As a global agribusiness and food company, Bunge is another attractive name among agriculture stocks for your portfolio. Bunge operates in the agribusiness, edible oil, sugar and fertilizer business.
With steady visibility for growth in demand for oilseed, the company is well positioned for growth. It’s worth noting that Bunge has 51 oilseed processing plants globally. This allows the company to cater to regional demand. In addition, Bunge is also focused on biofuels and plant-based protein. In the coming years, these business segments are likely to deliver earnings upside.
From a shareholder value creation perspective, Bunge has a robust dividend payout of $2 per share. And with the company targeting steady earnings growth in the coming years, dividends are likely to grow. Also, at a current dividend yield of 4.63%, BG stock is attractive for income investors.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector. As of this writing, he did not hold a position in any of the aforementioned securities.