Turning agricultural products into gold
Sean O'Reilly (Archer Daniels Midland): My pick for the ideal value stock as part of a retirement portfolio, Archer Daniels Midland, has a great deal to offer any Foolish investor. It boasts a forward P/E ratio of just 15, and earnings per share are expected to grow to $3.37 on average by fiscal 2020, according to analysts polled by S&P Global Market Intelligence. The company is a bastion of value in a world where the forward P/E ratio of the S&P 500 index is 24.
Founded in 1898 as a milling company in Minneapolis, Archer Daniels Midland is an agricultural-products powerhouse. Today, it's a modern commodity operator, offering everything from oilseeds, corn, and rice for food manufacturing to ingredients for animal feed and cotton pulp for paper manufacturing. The company made a big move with its $3 billion acquisition of German natural-ingredients company Wild Flavors in 2014, pushing itself further into the increasingly important business of natural flavors, proteins, and health products.
The company is a prime example of sound financial management and execution. It generated $957 million of free cash flow in the 12 months ended March 31, up significantly from $593 million in fiscal 2016. In the company's Q1 earnings press release, CEO Juan Luciano touched on the reason for the improvement:
We are continuing to execute the long-term strategic plan that we launched in 2012, and we are seeing the results. We have strengthened our core, improving our cost positions and implementing measures to improve results where necessary. Our operational-excellence initiatives have delivered significant savings and efficiencies. And we continue to grow strategically by expanding into new geographies and increasing our capabilities in food, beverage, and feed. Those actions contributed to the improved results we saw in the first quarter despite muted margin environments in some businesses. The continued momentum in the execution of our plan gives us confidence that we will deliver sustainable value creation.
This is a rock-solid business sporting a low valuation compared with the rest of the market, all while it generates plenty of cash to do things like expand the business and maintain its healthy 3% dividend yield. For retired value investors, there's a lot to love.
A cheap dividend growth stock hiding in plain sight
Jason Hall (Phillips 66): Shares of Phillips 66 are trading a little above one-year lows, down more than 10% since the start of the year. At the same time, the company has seen its earnings fall sharply over the past couple of years, as refining margins have been squeezed by falling crude prices around the world. This situation has the company trading at more than 24 times the past year's earnings, a number that's not cheap by any stretch of the imagination.
But now's a bad time to evaluate Phillips 66 based on last year's earnings -- especially after the results the company posted to start the year. Not only was this a solid quarter for the company's refining business, which reported a near tripling of its profits year over year, but the midstream and chemicals segments also reported profit growth on both a GAAP and adjusted basis. All told, quarterly profit increased 40% year over year, and 267% sequentially. With the growth of its midstream and chemicals segments combining with an expected bounce-back in refinings, full-year profits are on track to come in well above last year's levels, and that makes Phillips 66 cheap, trading at 12 times projected 2017 earnings.
Furthermore, the company's management is relentlessly focused on using cash flow growth to fund regular dividend increases. The company just announced an 11% dividend raise, putting the yield at 3.6% at recent prices. Since 2012, the company has increased its dividend 350%.
Put it all together, and Phillips 66 is a dividend growth stock at a bargain price. That's ideal for retirement investors.
Trust the best in the world to help you beat the market
Steve Symington (Berkshire Hathaway): Normally I favor dividend-paying stocks for retired investors, so it might be a surprise that I'm arguing for Berkshire Hathaway as a compelling buy. As fellow Fool Matthew Frankel pointed out recently, though renowned value investor and Berkshire CEO Warren Buffett loves to pack his company's enviable portfolio full of generous dividend payers, he has famously shunned the prospect of his company paying a dividend. Instead, Buffett has consistently demonstrated his unrivaled ability to compound shareholder value by reinvesting in Berkshire's existing businesses, acquiring new businesses, or buying back Berkshire Hathaway shares. On the latter, Buffett has historically preferred to buy back shares only if Berkshire Hathaway stock falls below 1.2 times book value -- an exceedingly attractive price for a business of this caliber.
But at Berkshire's recent annual shareholder meeting, Buffett surprised investors by hinting that the company may consider initiating a dividend if it can't find a better way to put some of its roughly $80 billion in cash, cash equivalents, and Treasury bills to work. In addition, Berkshire is looking at whether to raise its acceptable buyback floor to a slightly higher but still attractive level. Either way, trying to find the best way to put all of Berkshire Hathaway's money to work is an enviable problem to have. And with Berkshire Hathaway stock currently trading at a reasonable 1.37 times book value as of this writing, I think retired investors would do well to pick up shares and trust Warren Buffett to extend his market-beating ways.
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