Federal Agricultural Mortgage Corp is A Rising Star with Solid Fundamentals

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Written By Keziah Monique Gayo

Since July 2023, Federal Agricultural Mortgage Corporation (NYSE: AGM), also known as Farmer Mac, has demonstrated exceptional performance with a return of over 17%, outpacing the S&P 500’s return of 11.5%.

A recent dividend increase of 27% has prompted a reevaluation of the company’s valuation and potential for continued growth.

Strong Financial Performance and Dividend Increase

Farmer Mac’s recent decision to raise its dividend by 27% signals good financial health and confidence in future earnings potential.

Credit: DepositPhotos

This substantial increase is a rarity and highlights the company’s good cash flow and prudent financial management.

The new quarterly dividend rate of $1.40 per share reflects a yield of just over 3%, which, while below the four-year average of 3.34%, still presents significant value given the company’s growth trajectory.

Business Model and Market Position

Farmer Mac operates in two primary segments:

Agricultural Financing: This segment, which forms the bulk of the business, focuses on loans secured by agricultural real estate, encompassing farms and ranches. It also includes AgFinance corporate loans.

Rural Infrastructure Finance: This area concentrates on financing rural utilities and renewable energy projects, reflecting a growing market need.

The company’s strategy involves purchasing agricultural and rural loans from lenders, providing them with liquidity and a secondary market.

This model has allowed Farmer Mac to build a diverse and stable loan portfolio, primarily comprising crop (49%), permanent planting (22%), and livestock (19%) loans.

Geographic and Portfolio Diversification

Farmer Mac’s exposure is well-distributed across the United States, with significant concentrations in the Southwest.

This geographic and sector diversification helps mitigate risks associated with market fluctuations and specific regional economic challenges.

Impressive Dividend Track Record and Growth Prospects

The dividend history of Farmer Mac is commendable, with 12 consecutive years of increases. The compound annual growth rate (CAGR) of the dividend over the past decade stands at 25.12%, resulting in a total increase of 900%.

This consistent growth not only enhances shareholder value but also improves the yield on cost over time, significantly benefitting long-term investors.

Valuation and Market Outlook

Despite trading at a P/E ratio of 11.33, slightly above its five-year average of 10.20x, Farmer Mac appears undervalued when considering its growth prospects and recent financial performance.

The Wall Street consensus price target of $227 per share suggests a potential upside of 26.87% from current levels.

Updated Financials and Strategic Growth

Farmer Mac’s most recent financial results for Q4 2023 reveal a revenue increase of 18.4% year-over-year, with net interest income growing by 21%.

The total business volume for 2023 was $2.55 million, a notable increase from $2.3 million in 2022.

These figures underscore the company’s ability to effectively manage and expand its loan portfolio while maintaining a low delinquency rate of only 0.12%.

Risks and Considerations

While Farmer Mac’s fundamentals are strong, it operates in a market sensitive to economic cycles and interest rate changes.

Credit: DepositPhotos

However, the company’s conservative lending practices and stringent borrower assessments mitigate these risks.

Additionally, the potential for increased delinquencies in a recession scenario is a concern but is counterbalanced by the company’s solid liquidity and capital position.

Strong Buy Recommendation

Federal Agricultural Mortgage Corp represents a compelling investment opportunity, combining growth potential with a conservative risk profile.

The company’s ability to consistently increase dividends, coupled with strategic management and a solid position in niche markets, make a compelling case for investors.

With potential significant upside and strong financial health, Farmer Mac is well-positioned to continue its trajectory of outperforming market indices and delivering substantial shareholder value.


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