Today I wrote puts on ADM. Archer Daniels Midland is the world’s largest (and vertically integrated) food processing company. It’s specialty is corn and corn products. There are two major tailwinds behind the business. The first is the world population is growing, thus more grain is needed. The second, and this is important, is that the poorest areas of the world where billions live are rapidly entering the middle class. As this happens, they upgrade their diets especially with more meat. It takes almost 5 pounds of grain to produce a pound of edible chicken. For beef, the ratio is 12 to 1. Because of this, demand for grain will grow strongly over the next couple of decades.
What about valuation, you say? By just about any measure ADM is cheap. It is hard to find a comp because of ADMs broad scope and unprecedented scale so I’m going to compare Free Cash Flow to the broad market. ADM’s price to free cash flow (P/FCF) is a tiny 7.4. The S&P 500 broad market index is trading for a P/FCF multiple of about 19.8. So you can see ADM is an outstanding value versus the index. If I get assigned, I can expect 2.4% dividend yield annually. This is growing. Oh yeah, ADM is also paying down debt and buying back shares and dividend growth has been strong. This is a company that is aggressively rewarding shareholders.
How did the Lizard King make out on his puts? I sold ADM150417P00046000 for 1.11. That comes out to 2.4% or a very tasty 23.8% annualized return over 37 days. Breakeven is at 44.89 which is 3.25% below spot, a fairly large move over 37 days for a big and slow moving megacap. If I get assigned, I will write covered calls about 10% out of the money for however long it pays. That should yield about 7% annually from premiums and dividends before any upside price appreciation. I will sleep well at night knowing my money is being risked on only the safest companies.
Devour your prey, raptors!