My pick for a stock that trades at less than $20 a share and has significant long-term growth potential is Farmland Partners (FPI 0.36%). This company is organized as a real estate investment trust (REIT) and is focused on – you guessed it – farmland, particularly in the United States. On Friday, the stock closed at $14.11.
Farmland Partners is one of only two publicly traded farmland REITs. Gladstone country is the other.
Before we dive in, a word of caution: while it’s possible to find some relatively undiscovered gems among lower-rated stocks, overall this area tends to be quite risky.
Why invest in REITs?
Real estate funds are attractive because they tend to pay solid dividends. In return for the special tax treatment, they must distribute at least 90% of their annual income as dividends.
Farmland Partners’ dividend currently yields about 1.7%. That’s on the low side for REITs, but the stock could be a good fit for investors more concerned with long-term capital appreciation than current income.
Why invest in US farmland?
Prime US farmland will, in my view, appreciate well over the long term due to supply-demand dynamics.
The supply of arable land is likely to decrease over time due to ongoing development and climate change leading to an increase in severe droughts at home and around the world. On the other hand, demand for crops grown on arable land should continue to grow. The world population is growing and more and more people in developing countries are moving into the middle class.
Additionally, the pandemic and Russian invasion of Ukraine have underscored the benefits of companies (and entire countries) with domestic supply chains. This is especially true in relation to supply chains for essential goods and raw materials such as food.
The current highly inflationary environment is another reason why now is a good time to invest in farmland, which investors can do by buying shares in a farmland REIT. Investing in physical assets tends to outperform other categories when inflation is high.
The business and key statistics of Farmland Partners
Farmland Partners, which went public in 2014, buys high-quality US farmland, which it leases to farmers to grow a variety of crops. It also offers third-party auction, brokerage, and farm management services.
At the end of the first quarter, the Company’s portfolio consisted of approximately 160,700 acres of owned farmland and 25,000 acres of managed farmland located in 19 states. With more than 100 tenants and 26 crop species grown on its farms, the Company has good geographic, tenant and crop diversity. The portfolio vacancy rate was 0%.
|company||market capitalization||dividend yield||Forward price/AFFO* Based on the company’s forecast for 2022||Total return of the stock since the beginning of 2022||The stock’s 5-year total return|
|Farmland Partners||$706 million||1.7%||50 to 64**||18.5%||83.8%|
|S&P 500 Index||—||1.59%||—||(22.3)||65.2%|
Last month, the company said it would increase its quarterly dividend by 20% to $0.06. CEO Paul Pittman attributed the rise to “strong earnings growth, significant asset appreciation, pared down [debt] Leverage and better cost transparency as a result of the class action dismissal.”
This dividend increase is the first since 2018. The 20% increase suggests that management is very confident about the company’s future profitability.
Farmland Partners shares are trading at 50 to 64 times the 2022 AFFO range that management has forecast for. That’s a relatively high valuation, but attractive stocks rarely come cheap.
Finally, investors can expect some cyclicality in a farmland REIT given the cyclicality in soft commodity prices, which are currently at or near all-time highs. However, I believe the long-term trend for these commodities will be up for the supply-demand reasons discussed. If this theory holds true, Farmland Partners stock should be a winner over the long term.