Dividend Investors: FPI Stock Now Yields 5%
November 4, 2016
FPI Stock: A Benefit to Dividend Investors
Investing in the agricultural sector can be very volatile for one’s portfolio, and the lack of yield just makes it even more difficult for dividend investors. A way dividend investors can access this sector and earn income is by owning Farmland Partners Inc (NYSE:FPI) stock.
Farmland Partners is a real estate investment trust (REIT) that manages and acquires existing farmland and land that has the potential to be converted to farmland. Once the land is in place and ready for use, Farmland Partners works with farmers to lower their input costs and create long-lasting business relationships. The company’s properties are located mainly in the Midwest and Southeastern U.S., with crops including soybeans, wheat, rice, and cotton. Farmland Partners is focused on diversification in terms of locations and the crops being farmed, generating stable rental income and looking for the potential of land appreciation, and rewarding shareholders.
Income and Growth
The market cap for Farmland Partners is approximately $142.0 million, hence it is considered a small-cap stock; that said, FPI stock is a high-dividend-paying stock. Based on the current price of $10.18, the dividend yield is 5.02%. Typically with small-cap companies, money should be retained to grow the business further before dividends are paid out. But Farmland Partners is in a different class, and since the company became public in 2014, it has had a dividend policy in place. The more impressive fact when looking at the dividend history is that there has been two dividend hikes since the initial public offering (IPO).
Even though FPI stock is a small-cap stock, management has bigger plans to create a larger company. In September, an accretive merger with American Farmland Co (NYSEMKT:AFCO) was announced, with the deal expected to be completed in the first quarter in 2017. This merger will create the largest public farmland REIT in the U.S. The market cap is expected to double, which means greater access to capital. The merger will also broaden the merged company’s footprint across the country and diversify the crop type. (Source: “Farmland Partners Announces Transformative, Accretive Merger With American Farmland Company,” Farmland Partners Inc, September 12, 2016.)
Farmland Partners shareholders are the real winners in this transaction because the merger will ensure the dividend continues to get paid out and potentially increases over time. The other positive in this story is that it is a growth story, which would add to the bottom lines of investors. Dividend investors always have their eyes on the agricultural sector because food is essential for one’s well-being.
We All Have to Eat
In analysis reports regarding the agricultural sector, the argument is always made that since everyone in the world needs to eat, there is just cause to invest. However, there are many different options that can be used to benefit from this argument—and with them, different risk levels. I will share a few different options for the agricultural sector and explain why Farmland Partners is a low-risk way of investing in this sector.
One could look at investing in a fertilizer producer like Potash Corporation of Saskatchewan Inc (NYSE:POT). Potash is in a drought, with their fertilizer prices sinking, leading to the recent cut of its dividend and sales outlook. The shares are down 70% over the past five years and investors are not pleased with the results. The story doesn’t get any better for Caterpillar Inc. (NYSE:CAT), where shares are down approximately 20% in the last five years. This is due to less demand and a lowered sales guidance.
These agricultural companies do offer dividends for income investors, but the companies are much more volatile and could have huge swings due to a commodity drought in their particular products, which would be reflected in the share performance. If the drought does get worse, such companies will have to consider cutting the dividend to retain as much cash as possible.
Farmland Partners is on the optimistic side of things and sees growth in the future. The company’s actions speak for themselves, with a head-on approach that has seen increases in the dividend payment and growth with the new merger.
Final Word on FPI Stock
For dividend investors, Farmland Partners can potentially be a great stock to own. It is a unique investment in the REIT and agricultural sectors. The shares have been stuck in a trading range since the IPO, so the rate of return for dividend investors has been just the dividend return. The merger with American Farmland Company will add to the company’s bottom line and drive growth further.
