Farmer Mac: A Highly Leveraged Constant Dividend Payer (AGM)


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This article was researched and written by January Mbuvi.

Investment thesis

Federal Agricultural Mortgage Corporation (NYSE: AGM) is a government chartered organization that provides loans at below market interest rates for rural infrastructure and agricultural mortgages in United States. The company’s stock prices plateaued from 2018 to 2020, but have since risen, outperforming the market by around 8% year-to-date.

S&P 500 Year-to-Date Chart

Looking for Alpha

Healthy farm income and farmer liquidity were the main contributors to the strength of the agricultural economy, which led to a positive performance. High agricultural prices and robust demand generated income and cash. Strong customer revenue growth is reflected in the company’s success. Its latest quarterly earnings report showed record revenue of $30 million and a historically low delinquency rate of just eight basis points. [bps].

The company is performing well due to its diversified revenue streams. Higher profit margins speak well of the company’s dividend payment. I draw investors’ attention to the company’s strong balance sheet, which speaks volumes about the company’s ability to grow in the future.

I am bullish on the stock due to the company’s excellent growth potential, supported by its liquidity, leverage and high profit margins. For these reasons, I think the stock is a solid buy.

Various sources of income

Raising capital to finance agriculture has been a challenge in most economies. This challenge is due to the fact that banks, microfinance institutions and institutional investors have traditionally provided very limited resources to the sectors. It is a revolutionary concept for AGM to enter this underserved market with low interest credit. To capitalize on this opportunity, AGM entered the industry with various revenue streams, which enabled it to maximize profits and mitigate risks associated with a single revenue stream. The diversity of the business contributed to a stronger Q2 2022.

Brad Nordholm, “The diversity of our sources of income, combined with our credit discipline and our strategic positioning of the balance sheet, allow us to achieve a very good quarter.”

Here are some of the revenue streams and how they perform:

Financing of rural infrastructure: Rural infrastructure financing activity increased $193 million, or 3%, in the second quarter due to loan purchases. Demand for this product has increased to fuel the planned maintenance and capital expenditures of rural electric operators. This trimester [Q2 2022]a $34 million commitment to a solar project has also boosted funding for rural infrastructure.

Agricultural finance sector: Due to strong volume of Farm & Ranch loan purchases, Agricultural Finance grew by $43 million in the second quarter of this year. The scheduled maturities and an early refinancing of the amply advantageous security somewhat offset this increase. Rising interest rates boosted demand for medium- and long-term loans in the second quarter.

Renewable energy: At the end of the quarter, the renewable energy portfolio was worth approximately $150 million, compared to approximately $87 million at the end of the year. The company says the pipeline looks solid for the second half of the year.

Above are the main sources of revenue for the company, and they both saw improved results. In my view, and guided by the company’s sentiments that the future is bright, investors should expect stronger future quarters, as diversity is key to strong quarterly results.

Top and bottom lines

AGM’s revenues and profits have grown steadily over the past three years, primarily due to strong demand for low-interest loans and the resilience of the U.S. farm economy discussed earlier in this article. . Its quarterly year-over-year revenue growth increased by 38.32% and net income by 46.70%.

Chart
Data by YCharts

In terms of profitability, AGM has a gross profit margin of 100%, an EBIT margin of 152.2%, a net profit margin of 57.25% and a return on equity of 13.5%. Under benchmarking methodology, AGM’s profitability based on the above factors significantly exceeds the industry median. 63.57%, 28.21% and 11.67%, respectively, are the industry medians. These figures demonstrate that even compared to its competitors, AGM is quite profitable.

The company also effectively converted this increase into cash, as its operating cash [TTM] is now $656.6 million, up from $436.4 million at the end of the year. The growth in cash flow is mainly due to the increase in revenues over the past three years. Due to its low-interest loans, I expect demand for the company’s offerings to continue to grow as agricultural commodity prices continue to soar in the United States, attracting more farmers to start farming. So, in my opinion, the high demand for their offerings will be a tailwind to their profits and revenue.

Robust and heavily indebted balance sheet

In assessing the company’s balance sheet, I will focus on liquidity, debt (leverage) and relevant ratios supporting the two main aspects. I will also put the items in the contest for efficiency and a catalyst for growth.

First, AGM has $941.72 in cash, roughly 83% of its $1.13 billion market capitalization. The company’s current ratio is also 1.49. The high cash balance is essential because it will help the business meet its financial obligations, such as operating expenses and debt service. The company’s general liquidity ratio gives us confidence in its ability to cover its current liabilities with its current assets. The company has sufficient cash to fund its short-term obligations and its current assets cover its liabilities by approximately 1.5x. This figure gives investors confidence in the company’s short-term financial health.

I also find that the company is highly leveraged, both financially and operationally. As for financial leverage, it has a total debt of $24.47 billion, which is 21 times its market capitalization. It is crucial to assess the company’s ability to service this high level of debt. Using the interest coverage ratio to assess, AGM has a ratio of 1.89, or almost two. This ratio shows that the company is generating sufficient profit over interest expense to service the debt. In the calculation, I used EBIT [TTM] value of $428 million [shown on the graph below] and TTM interest expense of $225.6 million in the income statement.

Chart
Data by YCharts

The other aspect of leverage is operating leverage. [O.L], where the firm has an OL of 0.6; in addition, AGM has some operating leverage [DOL] of 1.23. These figures show that the company’s EBIT will change significantly due to slight variations in its revenues.

ICR, OL and DOL

Author’s calculation

It is essential to assess the company’s effectiveness in earning income from financing, given the substantial level of indebtedness. The company’s cash flow from financing is currently $1,732 million, compared to $534.6 million at the end of 2021. In my opinion, the company is effectively using its debt to generate cash flow . This efficiency should inspire confidence among investors in the company’s ability to improve its performance, given the high level of debt which generates solid cash.

Dividends

AGM has maintained its reputation as a reliable dividend provider. Unlike the industry average of 9 years, it has consistently paid dividends for 16 years. The company’s dividends have increased every year for the past decade, a testament to its superior dividend distribution practices.

Dividend Growth History

Looking for Alpha

Its dividend payout ratio lags at 10%, leaving a significant margin as retained earnings for development. The company’s average 4-year return is 3.62%. These proportions are very realistic and very durable. I am convinced that the company will maintain its dividend distribution policy and continue to grow, as its high leverage is audacious for its future development.

Conclusion

AGM being a cheaper lender, especially in agriculture, makes its offering very affordable and competitive. High agricultural commodity prices and growing demand have resulted in a resilient agricultural economy in the United States, which has impacted AGM’s performance, particularly in the MRQ. AGM has diversified its revenue streams to maximize revenue and improve performance.

The company reported attractive results in terms of revenue and earnings. Its balance sheet is strong and the company has high leverage – those bold assets for its future growth. I expect the company to maintain its growth and therefore its dividend policy.

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