This Dividend Grower Taps The Tariff ‘Sweet Spot'
3D illustration of a rubber stamp with the word tariff stamped on paper background. Concept of taxes ... More or duties on imported goods.
The UK trade deal was apparently the tasty egg roll before the main course of lower Chinese tariffs. A delightful order for this dividend grower, ready to feast on the 'Peking duck' of trade agreements.
China is one of the biggest buyers of US crops, importing tens of billions of dollars of American agriculture every year. Soybeans and corn meander from Midwest farms all the way across the Pacific to feed China's large (and growing) livestock industry. Higher US-China tariffs have weighed on US farmers' profitability—and in turn, on business for key ag suppliers like Corteva Agriscience (CTVA).
So the 'trade truce' with China (announced Monday) is quite bullish for Corteva. Tariffs have dropped from an atmospheric 125% down to a manageable 10% on US exports to China, and from 145% to 30% on imports from China. This will lift farmers' bottom lines and Corteva, thanks to its strong domestic footprint, should flourish in this new 'Goldilocks' tariff zone—where tariffs protect US suppliers but don't restrict trade altogether.
Corteva, spun out from DuPont de Nemours (DD) in 2019, comes at the ag biz from many angles. Corteva supplies farmers with products for pest and disease control, as well as seeds, livestock feed and nutrient maximizers, which help stabilize nitrogen levels in the soil.
All these products boost crop yields—critical because cheap food prices are a focus for the administration. President Trump and Treasury Secretary Scott Bessent want lower oil ('drill baby, drill') and grain prices so that inflation remains subdued. Thus, a domestic manufacturer like Corteva is doubly important to their goal of keeping a lid on corn prices.
Upcoming infrastructure investments in the US, especially upgrades to rails and ports to expedite grain exports, will reduce operational costs and help farmers' margins. They will have the cash to invest more in crop optimization—where Corteva excels.
The company's digital platform, Granular, helps farmers optimize planting decisions, monitor crop health and maximize harvests. This 'digital agriculture' is sweeping the heartland, projected to grow 12% per year for the foreseeable future, driving Corteva profits.
Each new digital customer, of course, pays Corteva a recurring fee, the standard for profitability and predictability.
The company knows it sits in a 'sweet spot' of farm productivity and domestic investments. It's so confident of cash flow and future profits that the board recently announced a $1 billion share buyback program for 2025, an initiative that will take a fat 2.5% of its float off the market.
Fewer shares outstanding will bolster Corteva's earnings, dividend coverage and, of course, the payout itself. Which will set the stage for more dividend hikes down the road because it's easier to raise with fewer shares to pay out on.
Corteva's divvie growth over its short life has already been tasty. Management has delivered four straight dividend hikes, powering the dividend magnet. Its stock price (orange below) has tracked the payout (purple) higher—sometimes running ahead, sometimes behind, but always snapping back.
This was the 'dividend magnet' view when we added CTVA to our Hidden Yields portfolio just four weeks ago:
CTVA Dividend Magnet
Corteva can keep those hikes coming, too. Its conservative 30% free cash flow payout ratio means plenty of runway for future increases.
My only problem with Corteva here is that it's already up 15% since our HY recommendation. This annualizes to a terrific 297%! The dividend magnet acted quickly and snapped this share price above my 'buy up to' price of $65.
Let's be patient—and see if we can buy this on a dip below $65.
Brett Owens is Chief Investment Strategist for Contrarian Outlook. For more great income ideas, get your free copy his latest special report: How to Live off Huge Monthly Dividends (up to 8.7%) — Practically Forever.
Disclosure: none
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