Federal Agricultural Mortgage Corp.: You Can Bet the Farm on This 4% Dividend
By: John Whitefoot, BA
Federal Agricultural Mortgage Stock Provides Strong Dividend Growth
Federal Agricultural Mortgage Corp. (NYSE:AGM) capitalizes on the fact that people love to eat, and American farmers grow what we eat. The company, also known as Farmer Mac, provides farmers with the money to do so. Best of all, the company has little competition and cheaper debt costs than its peers. Even during the COVID-19 pandemic, this has helped it provide investors with strong capital appreciation and consistent dividend growth.
A bit of background. Farmer Mac operates like a bank, but it’s not one—it’s better. The company provides a secondary market for a range of loans made to borrowers in rural America. (Source: “Corporate Fact Sheet,” Federal Agricultural Mortgage Corp., last accessed February 9, 2021.)
The company’s four segments are Farm & Ranch, USDA Guarantees, Rural Utilities, and Institutional Credit. (Source: “2019 Annual Report,” Federal Agricultural Mortgage Corp., last accessed February 9, 2021.)
As the country’s premier secondary market for agricultural credit, Farmer Mac provides financial solutions to a broad spectrum of the agricultural sector, including agricultural lenders, agribusinesses, and other institutions that can benefit from the company’s access to flexible, low-cost financing and risk management tools. This often allows Farmer Mac to provide the lowest cost of borrowing to agricultural and rural borrowers.
Strong Financials Protect AGM Stock’s High Dividend Yield
While some people invest in stocks simply because of their high dividend yield, it’s important to find stocks that also provide strong capital appreciation. When the price of a stock falls, the dividend rises. If you only look for stocks with massive dividend yields that continue to get bigger, you could lose money from your initial investment.
Instead, you’ll probably want a stock that provides consistent dividend growth and strong capital appreciation. And Federal Agricultural Mortgage stock does just that.
Since the start of 2016, AGM stock has advanced approximately 215%. Over the same time frame, the S&P 500 has advanced 92%.
Chart courtesy of StockCharts.com
Federal Agricultural Mortgage stock continues to do well because the company continues to report strong financial results. Over the last three years, its core earnings have expanded at a compound annual growth rate of 12.6%. (Source: “2019 Annual Report,” Federal Agricultural Mortgage Corp., op cit.)
In 2019, the company generated net revenue of $191.7 million and adjusted core earnings of $93.7 million, up 12% from $84.0 million in 2018. It also added $1.4 billion of net new business volume during the year, bringing the company’s total outstanding business volume to a record $21.1 billion.
Federal Agricultural Mortgage will be reporting its financial results for full-year 2020 sometime in mid-to-late February. By all accounts, it was another strong year for the company.
In the third quarter, Farmer Mac reported total revenue of $56.9 million, an 18.5% increase over the $48.0 million in the same prior-year period. During the quarter, it provided $1.3 billion in liquidity and lending. (Source: “Farmer Mac Reports Third Quarter 2020 Results,” Federal Agricultural Mortgage Corp., November 9, 2020.)
The company’s net income climbed 29.5% year-over-year to $18.7 million, or $1.73 per share. Its core earnings went up 18.4% to $27.7 million, or $2.57 per share.
Farmer Mac continues to be financially solid; it ended the third quarter with $910.6 million in cash.
You might think that because of COVID-19 and ongoing trade wars that loan delinquencies would be up. But you’d be wrong.
Normal farm subsidies have been supplemented with additional funding to combat those two issues. As a result, 90-day delinquencies were just 0.4% of the total outstanding business volume. On top of that, Federal Agricultural Mortgage Corp.’s management said that, despite COVID-19, farm incomes were expected to rise in 2020 and that land prices have been steady.
At the end of the third quarter, Farmer Mac’s outstanding business volume was $22.0 billion.
“We continue to execute and produce very strong results in the face of the ongoing pandemic, once again generating double-digit net effective spread and core earnings growth,” said Brad Nordholm, president and CEO. (Source: Ibid.)
“We also remained competitive in the debt capital markets and held ample liquidity on our balance sheet to ensure that we successfully fulfill our mission during this unpredictable economic environment.”
Annual Dividend Has Increased 471% Since 2014
Thanks to its strong operations and liquidity, Federal Agricultural Mortgage Corp. has been able to raise its annual dividend since 2013. That year, AGM stock paid out $0.24 per share (only for the second half of the year). In 2020, the annual dividend rate was $3.20, for a total gain of 1,233%.
In 2014, the first full year in which the company paid dividends, Federal Agricultural Mortgage stock’s dividend rate was $0.56, meaning the 2020 dividend was 471% higher.
(Source: “AGM Dividend History,” Nasdaq, last accessed February 9, 2021.)
Farmer Mac declared its most recent quarterly dividend in November 2020, of $0.80 per share. As of this writing, the dividend yield stands at four percent, with a payout ratio of just 37.6%.
The company is on track to report full-year 2020 net income of $9.00 per share. That means its dividend is safe and is ripe for another big increase in 2021.
The Lowdown on Farmer Mac
Federal Agricultural Mortgage Corp. is a financially robust financial services company with a strong foothold in a niche market.
Because the U.S. federal government will always provide financial support to farmers, it’s a safe industry for the company to be in. This has resulted in consistent revenue and earnings growth, which has translated into strong capital appreciation and a reliable, high-yield dividend.
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