Farmer Mac: A Highly Levered Consistent Dividend Payer (AGM)

Money bag on the background of agricultural crops in the hand of the farmer. Agricultural startups. Profit from agribusiness. Lending and subsidizing farmers. Grants and support. Land value and rent.

Andrii Yalanskyi/iStock via Getty Images

This article was researched and written by January Mbuvi.

Investment Thesis

Federal Agricultural Mortgage Corporation (NYSE:AGM) is a government-chartered organization that offers loans at below-market interest rates for rural infrastructure and agricultural mortgages in the United States. The company’s share prices plateaued from 2018 to 2020, but, since then, they have been rising, outperforming the market by about 8% YTD.

S&P 500 Chart YTD

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Healthy farm income and liquidity on the part of farmers were primarily responsible for the robustness of the agricultural economy, which led to positive performance. High agricultural prices and robust demand generated income and liquidity. Customers’ strong revenue growth is mirrored in the company’s success. Its most recent quarterly earnings report showed a record $30 million in revenue and an all-time low delinquency rate of just eight basis points [bps].

The company has good top and bottom lines due to its diversified revenue streams. The higher profit margins speak well about the company’s dividend payment. I draw the attention of investors to the company’s strong balance sheet, which speaks volumes about the company’s future growth capability.

I am optimistic about the stock due to the company’s excellent growth potential, which is supported by its liquidity, leverage, and high-profit margins. For these reasons, I believe the stock is a strong buy.

Diverse Revenues streams

Raising capital to fund agriculture has been a challenge in most economies. This challenge has been so because banks, microfinance institutions, and institutional investors have traditionally provided very limited resources for the sectors. It is a revolutionary concept for AGM to enter this underserved market with low-interest credit. To capitalize on the opportunity, AGM entered the industry with diverse revenue resources, which enabled them to optimize profits and mitigate risks associated with a single revenue stream. The company’s diversity contributed to a stronger Q 2 2022.

Brad Nordholm, “The diversity of our revenue streams, combined with our credit disciplined and strategic balance sheet positioning, enable us to deliver a very strong quarter.”

Below are some of the revenue streams and how they performed:

Rural infrastructure finance: The rural infrastructure finance business grew $193 million, or 3%, in the second quarter due to loan purchases. Demand for this product grew to fuel rural electric operators’ planned maintenance and capital spending. This quarter [Q2 2022], a $34 million commitment to a solar project also boosted Rural Infrastructure Finance.

Agricultural finance sector: Due to robust Farm & Ranch loan purchase volume, Agricultural Finance grew $43 million in the second quarter of this year. Scheduled maturities and an early refinance of ample advantage security somewhat offset this rise. Rising interest rates drove demand for intermediate- and long-term loans in the second quarter.

Renewable energy: At the end of the quarter, the renewable energy portfolio was worth about $150 million, up from about $87 million at the end of the year. The company says the pipeline looks strong for the year’s second half.

Above are the company’s primary revenue streams, and they both registered improved results. In my opinion and guided by the company’s sentiments that the future is promising, investors should expect stronger future quarters since diversity is key to good quarterly results.

Top and bottom lines

AGM’s revenues and profits have grown consistently over the past three years, mainly due to the robust demand for low-interest loans and the resilient U.S. farm economy discussed previously in this article. Its revenues quarterly growth YoY has increased by 38.32% and the net income by 46.70%.

Chart
Data by YCharts

In terms of profitability, AGM has a 100% gross profit margin, an EBIT margin of 152.2%, a net income margin of 57.25%, and a return on equity of 13.5%. According to a comparative evaluation method, AGM’s profitability based on the above factors significantly outperforms the industry median. 63.57%, 28.21%, and 11.67%, respectively, are the industry medians. These numbers demonstrate that, even in comparison to its competitors, AGM is quite profitable.

The company has also effectively converted this increase into cash, as its cash from operations [TTM] is now $656.6 million, up from $436.4 million at year’s end. The growth in cash flow is primarily due to the increased revenues over the last three years. Due to its low-interest loans, I expect the demand for the company’s offerings to grow even further as prices for agricultural products keep soaring in the U.S, attracting more farmers to venture into farming. Thus in my view, the strong demand for their offerings will be a tailwind to their profits and revenues.

Robust and highly levered balance sheet

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

First of all, AGM has $941.72 in cash, which is about 83% of its market cap of $1.13B. The company’s current ratio is also 1.49. The high cash balance is essential in that it will help the company meet its financial obligations, such as operating expenses and debt servicing. The company’s current ratio gives us confidence in its ability to cover its current liabilities with its current assets. The company has adequate cash to finance its short-term obligations, and its current assets cover its liabilities by about 1.5x. This figure gives investors confidence in the company’s short-run financial health.

I also find the company highly levered both financially and also operating leverage. On the part of financial leverage, it has a total debt of $24.47b, which is 21X its market cap. It is crucial to evaluate the company’s ability to service this high debt level. Using the interest cover ratio to evaluate, AGM has a ratio of 1.89, which is almost two. This ratio shows that the company is generating adequate profits in relation to interest expense to service the debt. In the computation, I used the EBIT [TTM] value of $428M [shown on the graph below] and the TTM interest expense of $225.6M in the income statement.

Chart
Data by YCharts

The other leverage aspect is operating leverage [O.L], whereby the company has an O.L of 0.6; additionally, AGM has a degree of operating leverage [DOL] of 1.23. These figures show that the company’s EBIT will significantly change due to small changes in its revenues.

ICR,OL & DOL

Author Computation

It’s critical to assess the company’s effectiveness in earning income from financing, considering the substantial level of debt. The company’s cash flows from financing are currently $1732 million, up from $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 in investors over the company’s capacity to enhance performance, given the high level of debt that is creating strong cash flow.

Dividends

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

Dividend Growth History

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Its dividend payout ratio is trailing at 10%, leaving a significant margin as retained earnings for development. The company’s 4-year average yield is 3.62%. These proportions are very realistic and highly sustainable. I am confident the company will sustain its dividend payment policy and continue its growth because its high leverage bolds well for its future development.

Conclusion

AGM being a cheaper lender, especially in agriculture, makes its offering very affordable and competitive. The high agricultural commodity prices and the increasing demand have resulted in a resilient farm economy in the U.S. which has impacted AGM’s performance, especially in the MRQ. AGM has diversified its revenue streams to maximize revenues and improve performance.

The company has reported attractive top and bottom lines. Its balance sheet is strong, and the company has high leverage – these bold well for its future growth. I expect the company to maintain its growth and therefore sustain its dividend policy.

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