Investors Alley

Ignore the premature celebration on Wall Street that inflation has been beaten and all is well with the world.

In reality, inflation is not close to being “beaten.”

For example, take a look at food prices in the U.S., which increased 11.2% in the 12 months that ended September 30, after jumping 11.4% previously (the most since May 1979). This is according to the latest inflation data published October 13, 2022, by the U.S. Labor Department’s Bureau of Labor Statistics.

And now, food prices are once again facing upward pressure. The latest blow to consumers is due to the record cost for shipping grain in the U.S.: it now costs $90.45 to transport one ton of freight by barge along the Mississippi River from St. Louis, Missouri, to New Orleans, Louisiana. This data comes from an October 6 report by the U.S. Department of Agriculture.

The price of barge transport has tripled over the past 12 months, hitting the highest figure ever recorded since 2003, when comparable data was first recorded!

This is not good news for consumers. But as an investor, you can offset rising food inflation by choosing a company that can do well in the current economic environment…

The jump in cost for barge transportation is due to the fact that this year, drought conditions have caused water levels in the Mississippi River to drop a lot. This triggered barge draft restrictions that have limited the amount of cargo each vessel can carry. In other words, it takes more barges to transport the same volume of freight.

A mere 170,000 tons of soybeans, wheat, and corn traveled down one segment of the Mississippi River during the final week of September, according to Department of Agriculture data. That’s a 50% decline from the average volume over the past three years.

As one grain trading analyst told Nikkei Asia, “We thought food inflation had subsided, but now it is gaining steam again.”

Archer Daniels Midland at a Glance

One company that will do well from this food inflation is Archer Daniels Midland (commonly referred to by its ticker symbol, ADM), whose stock has easily outperformed the broad market in 2022, up more than 28% year to date.

Founded in 1902 and based in Chicago, Archer Daniels Midland purchases, transports, stores, processes, and merchandises agricultural commodities and products worldwide. One of the world’s leading producers of ingredients for both human and animal nutrition, ADM transforms natural products into staple foods, sustainable and renewable industrial products, renewable fuels, and a vast pantry of food and beverage ingredients, supplements, nutrition for pets and livestock, and more.

ADM’s operations are organized into three business segments: Ag Services and Oilseeds (58% of 2021 operating profit); Carbohydrate Solutions (27% of 2021 operating profit); and Nutrition (15% of 2021 operating profit).

The Ag Services and Oilseeds segment includes activities worldwide related to the origination, merchandising, transportation, and storage of agricultural raw materials, as well as the crushing and processing of oilseeds like soybeans and soft seeds (cottonseed, sunflower seed, canola, rapeseed, and flaxseed) into vegetable oils and protein meals.

The Carbohydrate Solutions segment is engaged in the wet and dry milling of corn and wheat, as well as other activities. ADM converts corn and wheat into products and ingredients used in the food and beverage industry, including sweeteners, corn and wheat starches, syrup, glucose, wheat flour, and dextrose.

The Nutrition segment serves various end markets including food, beverages, nutritional supplements, and feed, along with premix for livestock, aquaculture, and household pets. It engages in the manufacturing, sale, and distribution of a wide array of ingredients and solutions including plant-based proteins, natural flavors, natural colors, emulsifiers, soluble fiber, probiotics, prebiotics, enzymes, botanical extracts, and other specialty food and feed ingredients. This segment is ADM’s least volatile business and one of its more profitable, with EBITDA margins in the low-to-mid-20% range.

A Look Ahead at ADM

ADM has reported five consecutive quarters of results that have beaten Wall Street forecasts. I expect a sixth such quarter when it reports results in late October 2022.

The bullish outlook reflects my outlook for further growth in the Oilseeds business (thanks to increased exports), expanded European capacity in Carbohydrates Solutions, and continued strong growth in the Nutrition segment, which is benefiting from strong global demand for soybean meal.

Longer-term, I expect the nutrition business to grow from 15% of profits in 2021 to 27% by 2026. This will make ADM less exposed to the ups-and-downs of the grain market.

On the dividend side, ADM’s balance sheet is clean, with few near-term debt maturities over the next few years. And management has signaled confidence in raising the dividend again this year.

Archer Daniels Midland is a Dividend Aristocrat, having now paid a dividend for 90 straight years!

Dividends have averaged just above 40% of net income for the past decade—a steady and sustainable pace. In January 2022, ADM raised its quarterly payout by 8.1% (the biggest jump in seven years) to $0.40 per share, or $1.60 annually, for a current yield of about 1.9%.

I fully expect another nice jump in the dividend in early 2023 and believe ADM stock will continue to outperform the broader stock market. The stock, currently around $87 a share, is a buy anywhere up to $95 a share.
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Apple (AAPL) has been a haven in this turbulent market, but recent reports say it may not increase production of its new iPhone range because weaker-than-expected demand has caused a minor drop in its stock price.

Apple’s share price has fallen about 4% since those reports. The dip is an indication of the smartphone’s continued importance to the company, despite its efforts to diversify.

Speaking of diversification, are there products or services in Apple’s pipeline that could one day become as important to the company as the iPhone?

Here are two possibilities to consider…

Apple Going into Space?

Satellite/smartphone deals are all the rage in the telecoms industry, with deals aiming to connect satellites directly to either phones or cell towers.

Amazon has partnered with Verizon, OneWeb with AT&T, and Nokia with AST SpaceMobile. T-Mobile has signed a deal to connect smartphones to SpaceX satellites. SpaceX boss Elon Musk also says he has had conversations with Apple.

A move to satellites for Apple would align nicely with its current strategy. The company has started to use more of its own designed chips to increase autonomy over hardware manufacturing. And now, Apple may hope that satellites will give it more control over connectivity to its phones…which would put it in direct competition with wireless carriers like AT&T and Verizon.

Lending credence to the satellite prediction, Apple has already sealed a deal for satellite messaging services with the satellite communications company Globalstar (GSAT).

Apple has said its new iPhone 14 series will include an “Emergency SOS” feature that will allow users to send emergency messages via satellite when out of terrestrial network coverage. This feature will come online in November and initially will be available only in the U. S. and Canada; it will be free for at least its first two years.

The tie-up has pushed Globalstar’s share price up about 55% this year. It was a life-saving deal for the loss-making company, whose stock is only around $1.73 a share, and had revenues of only $124 million in 2021. Apple has warrants to acquire up to 2.64% of Globalstar’s stock at $1.01; in return for its investment, Apple will control 85% of Globalstar’s network capacity.

A buyout of Globalstar seems almost inevitable. The potential gains for Apple could be noteworthy. Keep in mind that Globalstar comes with an existing satellite network plus approval for satellite-based mobile services. That would be another big advantage against iPhone competition.

If Apple’s satellite services also include internet connections in the future, Apple could add another large source of recurring revenue. Internet access in many isolated locations in the world is very valuable.

And even if we focus on just the U.S., an Apple satellite network would be big for the company. If 1% of iPhone users paid $100 a month for internet access via satellite, this service would add close to $1.5 billion to the Apple’s annual revenue, adding to Apple’s bundle of profitable services.

The Next iPhone?

On the hardware side, Apple’s next breakthrough product could be a virtual reality (VR) headset, which could be unveiled as early as this autumn. The company has been moving toward producing this product for a while now, making about a dozen purchases in the fields of virtual and augmented reality over the past six years.

Little is known about this new Apple product, but a “pass-through” video system from Vrana, a start-up company Apple bought in 2017 for $30 million, might be a key feature. Vrana seemingly solved the problem of not being able to see real-world objects while being inside a virtual world. The company repurposed the cameras in its Totem prototype, which had been designed to sense a user’s position, to allow users to also view their surroundings. The whole idea here is that users would be able to see the physical world around them overlaid with digital images.

The VR market remains tiny in comparison to the smartphone market at the moment, and it is currently dominated by Meta Platforms (META). Sales of Meta’s Quest 2 headset reached an estimated 10 million units last year, giving Meta 78% of the VR market, according to research firm IDC.

But based on Apple’s history, it would not surprise me if Apple’s headset quickly does to the Quest headsets what the iPhone did to Blackberry and Nokia.

While few analysts expect AR or VR to go mainstream overnight, researchers at Citi expect that 1 billion people—roughly the number of iPhone users today—will be wearing headsets by 2030. The researchers believe this will translate to a market worth up to $2 trillion in revenue by the end of the decade.

Many things have to be fixed before this happens, however—including improvements in battery power, user interface, and physical comfort for VR and AR headsets. But Apple has done it before—recall that when Apple created the iPhone, its biggest breakthrough was to replace a physical keyboard with a multitouch screen.

Perhaps someday, Apple’s headset will rival and maybe even replace its iconic iPhone.

With these two potential blockbuster products/services coming in the relatively near future, Apple’s stock remains a buy. Just keep slowly accumulating Apple stock during the current bear market. You will be rewarded when Apple’s next big thing comes to fruition.
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A big deal in the grocery store space was announced last week with the potential acquisition of Albertsons (ACI) by Kroger (KR). The merger would create a grocery chain with roughly 12% control of the US market. It’s difficult to say if the deal will make it through antitrust scrutiny. Interestingly, short-term block options trades

With the stock market tumbling, investors are on the hunt for safer investments that pay attractive returns. The fact that you can earn 9.62% from a U.S. Savings Bond is getting a lot of buzz.

Today, let’s review the features, pros, and cons of investing in these Series I Savings Bonds.

The U.S. government sells two types of saving bonds. We may remember the Series EE Bonds from our youth when we received them as gifts. EE Bonds pay a fixed rate, currently set at 0.10%.

Series I Bonds pay a fixed rate plus the inflation rate. The fixed-rate sits at 0.0%; however, the inflation rate portion is currently set at 9.62%.

Series I Bond rates are set twice a year on May 1 and November 1. The rate you initially earn will be in effect for the six-month window when you purchase your I Bonds. To lock in the current 9.62% rate, you must buy I Bonds no later than October 28.

Series I Bonds compound semi-annually. This means if you buy an I Bond now, it will earn 9.62% for six months, and then the rate will reset to the rate in effect on the semi-annual anniversary date. Simply put, the Series I Savings Bond rate resets every six months.

Here are the features of Series I Savings:

You can buy up to $10,000 of electronic I Bonds per year per person. You buy bonds through the Treasury Direct website.You can buy electronic bonds for any amount of $25.00 or greater.You can invest up to $5,000 of your federal tax return into paper I Bonds.Paper bonds come in denominations of $50, $100, $200, $500, and $1,000.I Bonds earn interest for up to 30 years.You can redeem a bond after one year, but if you redeem during the first five years, you will be charged a three-month interest penalty.I Bond interest is exempt from state income tax.For federal income taxes, you can declare the interest each year and pay taxes or let the interest grow tax-deferred until you redeem the bonds.

Overall, in this era of high inflation, Series I Bonds are a pretty good place to sock away some money.

But, there are some potential pitfalls to consider:

The $10,000 annual investment cap limits how much money you can put into I Bonds. You can’t sock away your entire nest egg and earn a government guaranteed 9.62%.Interest compounds to the value of the bond. You cannot elect to have the interest paid out. Your earnings will be tied up until you redeem the bonds.The semi-annual rate reset means you may earn a much lower interest rate in the future. The next reset on November 1 should be very attractive, but the rate could be much lower a few years later.

If you can live with the restrictions, Series I Savings Bonds offer an attractive, U.S. government-guaranteed return with the current 9.62% yield (if purchased before October 28), and can provide some stability to your investment portfolio. You can buy savings bonds through an account on the TreasuryDirect.gov website.
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Some of the dividend stocks below are the best dividendstocks while others require more research. Ticker Ex-Div Date Pay Date Amount Yield ARR 10/14/22 10/28/22 $0.10 22.68% MVO 10/14/22 10/25/22 $0.69 15.10% GNL 10/12/22 10/17/22 $0.40 14.71% SBR 10/14/22 10/31/22 $1.02 14.34% RTL 10/12/22 10/17/22 $0.21 14.20% OXLC 10/14/22 10/31/22 $0.08 13.90% PMT 10/13/22 10/28/22

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Energy commodity markets have been focused on demand issues lately, but last week, OPEC announced a production cut, putting supply back in the spotlight.

This cut in oil production will result in higher energy prices. That’s going to be a change from the past several months, where gasoline prices, for example, have been falling.

As investors, we need to adapt. So today, let’s take a look at five investments that will benefit from higher energy prices…

The West Texas Intermediate (WTI) crude oil price peaked in early June at $122 per barrel. From there, a long, steady decline led to a late-September bottom at $77 per barrel.

The decline in the price of oil has been driven by many traders’ shared belief that demand will lessen due to the China lockdowns and a global recession. The fall was further helped by the Biden administration releasing one million barrels daily from the Strategic Petroleum Reserve (SPR).

But that trend is likely to turn soon, with crude oil moving higher. Last week OPEC announced a two million barrel-per-day reduction in production and oil sales. At the same time, the SPR has reached dangerously low levels, which will limit future releases. The administration may be forced to start buying oil to replenish the reserve.

Global oil consumption runs about 100 million barrels daily, with supply and demand closely balanced. Pulling up to three million barrels per day out of the supply can only lead to higher prices. This tight supply problem is one without an easy solution. Boosting production by adding drilling rigs takes a lot of money, government permits, and time. OPEC knows it can control prices by restricting output from its member countries.

Recently, Wells Fargo listed these energy companies as high-momentum stocks that should outperform if the energy sector moves higher:

APA (APA)Devon Energy (DVN)Marathon Petroleum (MPC)Marathon Oil (MRO)Occidental Petroleum (OXY)

Marathon Petroleum is a refining company; the rest of the companies listed here are upstream energy producers. I currently have two of these stocks in my Monthly Dividend Multiplier portfolio. To see how you can secure a rapidly rising dividend income today using Monthly Dividend Multiplier, see below.
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