One big shift we should see with the new Biden administration is better trade relations with China, notes Sean Brodrick, global investing expert and editor of Wealth Megatrends.
One area where trade relations will probably improve is agriculture. After all, China is a $20 billion market for U.S. agriculture.
Archer-Daniels-Midland Company (ADM) was one of the biggest trade war casualties. ADM specializes in food processing and commodity trading, and higher prices caused by tariffs crushed its profit margins and net income.
ADM collects 16% of its revenue from soybean production, and the company felt massive impacts from the 25% Chinese tariffs levied in response to U.S. sanctions. The 25% soybean tariffs left a gaping hole for Chinese soybean imports, and they rushed to source it elsewhere.
ADM benefitted at first from U.S. tariffs because it used its soybean production centers in Argentina and Brazil to fill the gap from China importing less from the U.S. This was short-lived because the South American demand spike raised the costs of ADM’s raw materials needed for processing.
Rising commodity costs from the trade war caused the company to report a year over year net income decline of 60% in the fourth quarter of 2018. The company has rebounded since then despite cumbersome trade policies. But if they’re loosened up, we could see a major boon as ADM optimizes its efficiency.
ADM has beaten earnings five straight quarters, and positive tailwinds from more accommodative trade policy moving forward will help them continue to build on that solid performance.
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Not everything is rosy. ADM’s revenue is volatile. But the diversification of its supply lines and a more favorable Chinese trade landscape with less soybean tariffs will catalyze a much bigger rebound.
Fundamentally, the stock is extremely cheap. ADM’s price-to-earnings ratio of 12.4 times is 39% lower than its peer-average of 23.2 times, while its price-to-book value is a bargain at 1.5 times.
ADM also pays a generous 2.8% dividend yield. That’s not a deciding factor, but it is a great bonus. It is a dividend aristocrat, though, a title only bestowed on companies raising their dividends for 25 years or more without interruption.
In fact, Archer-Daniels-Midland’s dividend growth streak is up to a remarkable 45 consecutive years, and it’s also grown 5% each year over the last five years.
