Recent Buy – Agrium Inc (AGU)

Agrium
I initiated a new position in Agrium Inc (AGU.TO). Agrium is a $13B company specializing in fertilizers and has a wide variety of products including the three main necessities in crop growth and health – Nitrogen, Phosphate and Potash (termed popularly – NPK). Agrium’s main market is industrial and commercial agriculture. The potash subsector has been in hot water lately due to collusion in the industry and price-fixing allegations, and as a result, the current fertilizer prices are subdued.
I initiated with a position in Agrium with 20 shares, and with a yield of 3.22%, adds approximately $64 to my annual dividend income.

Corporate Profile (from Yahoo Finance)

Agrium Inc. produces, retails, and distributes the crop nutrients, crop protection products, seeds, and agronomics primarily in North America, South America, Europe, and Australia. The company operates through two segments, Retail and Wholesale. The Retail segment supplies crop protection products, such as herbicide, fungicide, insecticide, and adjuvant products; crop nutrients, including dry and liquid nitrogen, phosphate, potash, sulfur, and micronutrients; seeds; and merchandise comprising fencing, feed supplements, livestock-related animal health products, irrigation equipment, and other products. It also provides product application, soil and leaf testing, crop scouting, seed treatment, cattle, livestock and wool marketing, insurance, and real estate, as well as offers plant nutrient and precision agriculture software packages. The Wholesale segment produces, markets, and distributes a range of nutrients, including nitrogen-based, potash, and phosphate-based crop nutrient products to agricultural and industrial customers. The company also offers crop-inputs technology and precision agriculture services under the Echelon brand name; and supplies specialty fertilizers. The company was formerly known as Cominco Fertilizers Ltd. and changed its name to Agrium Inc. in 1995. Agrium Inc. was founded in 1931 and is headquartered in Calgary, Canada.

Recent Buy Decision

The rationale behind investing in a fertilizer company is fairly simple and straight-forward. The continued rise and growth in demand for food puts agriculture as one of the top priorities over the next few decades.

  • The world population is expected to grow massively in the next few decades. Current UN projections estimate the world population to reach 8.3 – 10.9 billion by 2050. See figure on the right for the projection visual. Feeding all those people will require farms to be more productive and efficient.
  • Couple the growth in population with the advancement in healthcare, where people are living longer – the demand for food will continue to rise.
  • Using arable land to grow crops year after year causes the nutrients to run thin. Considering that the arable land in the world is limited, the need for supplementing the soil with fertilizers and other nutrients is essential.
  • I prefer AGU to its main competitors POT and MOS as it is more diversified. While MOS mines phosphate and potash-based fertilizers only, POT is the largest producer of potash with a small portion of its business in nitrogen and phosphate-based fertilizers; AGU produces nitogen, potash, sulfur, and phosphate-based fertilizers.
  • AGU pays a healthy 3.22% dividend with a payout ratio of 44.3%. The 5-yr DGR is 90.5% – although AGU will not be able to keep raising dividends at the same rate in the future.
  • Good valuation with a P/E of 14.52 and Forward P/E of 10.97.

Dividends

Agrium has been paying dividends since 1999. Until the end of 2012, dividends were paid semi-annually, but starting 2013, dividends are now paid quarterly. Agrium has been aggressively growing its dividends over the years. AGU has raised dividends 4 years in a row and has a 5-yr dividend growth rate (DGR) of 90.5% (thats not a typo!). The current payout ratio stands at 44.3%.

A special note about the dividend payment. Even though Agrium is a Canadian company, the dividends declared are in US dollars. Dividends paid to Canadian residents will be converted to Canadian dollars based on Bank of Canada’s exchange rate at noon on the record date.

Risks

Even though, I am bullish on this investment over the long term, the investment comes with some risks. The recent problems in the fertilizer industry has dampened the prices and the whole industry has suffered. In addition, there are a number of new entrants who have started undercutting the prices set by large companies such as AGU, POT, MOS etc; and hence could see some pressure on sales/margins.

A summary of the stock

  • Symbol: AGU.TO (also trades on NYSE under ‘AGU’)
  • Quote: $99.61
  • 52-week range: $83.46 – $108.28
  • P/E: 14.52
  • Forward P/E: 10.97
  • Debt/Equity: 0.53
  • Yield: 3.22%
  • 5-yr average yield: 1.30%
  • 5-yr DGR: 90.5%
  • Book value: 45.72
  • Graham number: 84.00
  • Chowder rule: 94

Do you own AGU? What are your thoughts on the sector and the industry? Make sure to leave a comment below.

Full Disclosure: Long AGU. My full list of holdings is available here.

Chatter Around the World – 54

Chatter Around the World is a weekly curated link update of articles related to economics, investing, dividends and personal finance. In these weekly updates, I also capture my blog updates and news related to my holdings.

New Blog Posts

Let’s dive into the links that caught my attention this week.

Updates from My Portfolio Holdings

General Reads

Dividend Reads

Dividend Stock Analysis

A Frugal Family’s Journey maintains a centralized list of dividend stock analyses from around the community. Be sure to check out the page here.

Have a wonderful weekend.

How to Hedge Your Bills

While there are many schools of thoughts when it comes to investing, a common one is “Invest in what you know”. The rationale behind this is that if you use products or services from a company regularly or see them doing business in your neighborhood, you can understand how the business works. While this should not be the only approach for investing, as I have discussed earlier in the importance of diversification, investors should also invest keeping geographical allocation in mind. Staying invested in companies only local will cause you to take on risk that could otherwise be mitigated. However, this does not rationalize investing in companies that you do not understand. Whenever I’m asked for investment my advise, I always have the following to say: Every investment should be well understood. If you do not understand how a company generates revenue and don’t understand its business model, then you shouldn’t be investing in it.

With that established, lets look at how investing in companies that you are intimately familiar with. What better way to understand a company’s business model but the ones you are a customer of, and contributing to its revenue regularly. When you are a customer of a company, you have probably done your research on the products or services offered and compared with their direct competitors. For whatever reason you chose the company for your business, every other customer goes through the same process. This can be a powerful thought process when it comes to investing.I am not dropping any revolutionary new knowledge or viewpoint here. There have been various other bloggers and investing professionals that have explored this idea. What I like to explore here is how you can use the investment in a company as a hedge those very bills.Always do your research before investing in companies. You may be a customer simply because they have the best rates in the market, but it could well be that the business isn’t being run well. 

In my case, I am a customer at BCE Inc (BCE) and Bank of Nova Scotia (BNS), both very strong dividend growing companies with a spectacular track record. As a customer, I chose them because they provide good service (albeit at a premium) and think the prices charged are fair and on par with market value. As an investor, I have researched enough to come to a conclusion that they are reliable businesses and have a bright future and great long term prospects. These companies are the type of companies that people may grumble about, day-in-day-out, but are great companies to invest in. People may hate them, but cannot live without them and the competition space is limited. Customers are provided with good service, but they are also charged a hefty sum of money unless well negotiated.

BCE Inc

Bell Canada, as it is commonly known, is the lifeline for millions of Canadians. The company owns a major stake in supported land lines across the country. In addition to cell phone service, Bell is also our internet service provider (ISP). Not only do we fork over $100 per month in cellphone and ISP bills, but Bell also charges us something called a dry-loop rate for our internet connection which is a very convenient $10 a month. The dry-loop is simply Bell activating our phone line port at home without a real phone line and charges customers for it. This is the kind of move that I hate Bell as a customer, but love it as an investor. Customers can grumble and whine about it all they want, but will eventually simply pay up – as it is non-negotiable.

BCE Inc is the largest Canadian telecom service provider including landlines, wireless services, and internet services. BCE is a dividend challenger, having raised dividends consecutively for 5 years and has a 5-yr DGR of 25.6%. In 2008, BCE suspended its dividend growth when it was a target of a leveraged buyout offer. That deal fell through and BCE and continued raising its dividends aggressively since.

Bank of Nova Scotia

Scotiabank, as it is commonly known, is one of the Big Five banks. In addition to our bank accounts, we ended up with our mortgage at Scotiabank as well, simply because they had a great product that fit our needs. We used a mortgage broker while purchasing our home and we ended up picking Scotiabank which had the best product offering. I have had a couple of friends who work for some of the other big banks in Canada but end up getting mortgages at Scotiabank simply because they offer the best products (even after getting an employee pricing discount on their own bank products). Stories such as these can be incidental, but cements my faith in Scotiabank as being  very competitive.

The Bank of Nova Scotia is the third largest of the Canadian banks by deposits and market cap. BNS is also the most international of the Canadian banks with exposure in 55 countries outside Canada. BNS has been paying dividends since 1832 – the second longest streak of paying dividends in Canada (first place goes to BMO which started in 1829). BNS saw a pause in its dividend growth during the financial crisis. However, BNS has started raising dividends after the crisis with a 5-yr DGR of 5.15%.

Full Disclosure: Long BCE, BNS. My full list of holdings are available here.

Valuation in the Aerospace and Defense Sector

The Aerospace & Defense sector makes for some great investments. The stocks discussed here are United Technologies Corp (UTX), The Boeing Company (BA), Lockheed Martin Corp (LMT), General Dynamics Corp (GD), Raytheon Company (RTN), Northrop Grumman Corp (NOC) and L-3 Communications Holdings Inc (LLL). All the stocks except BA are Dividend Contenders in David Fish’s CCC list; companies that have raised dividends consecutively for 10-24 years. BA saw a freeze in dividend raises from 2009 to 2011.
Each company discussed here has its own specialty and is the leader in manufacturing defense related products and services. I have not read enough about the sector to comment or recommend one stock or another based on the technology and business-outlook side of things. For now, I will simply be looking at the valuations and the financials/dividend history to compare the stocks. I recommended readers to do their own research before investing in any of the stocks discussed.The US spends a massive 3.8% of its GDP (numbers as of 2013) on military and defense budget. That amounts to about $640B – a number much larger than any other country on this planet. To put things into perspective, the military/defense budget of the next 10 highest spending countries need to be put together to get close to that number. Suffice it to say, that the defense contractors discussed here make for some juicy returns for your investment money.

Valuations

The current valuations of the stocks under questions are shown below.

United Technologies Corp (UTX)
United Technologies Corporation provides technology products and services to the building systems and aerospace industries worldwide. UTX is a conglomerate operating in six segments – Otis, UTC fire & security, Pratt & Whitney, Hamilton Sundstrand and Sikorsky. UTX has been raising dividends for 20 years in a row with 5-yr and 10-yr dividend growth rates (DGR) of 10.3% and 14.5% respectively.
UTX is probably the most diverse of the group, as the company is a conglomerate with defense being only one component of a massive corporation (defense revenue accounts for 21% of the company’s total revenue). UTX is also a DJIA component and the P/E valuation closely matches that of the index.
The Boeing Company (BA)
The Boeing Company, together with its subsidiaries, designs, develops, manufactures, sells, services, and supports commercial jetliners, military aircraft, satellites, missile defense, human space flight, and launch systems and services worldwide. The company operates in five segments: Commercial Airplanes, Boeing Military Aircraft, Network & Space Systems, Global Services & Support, and Boeing Capital. BA, after a freeze in dividend raises from 2009-2011, has started aggressively raising dividends since. Last year’s dividend raise was a whopping 50% and the 5-yr DGR currently stands at 8.18%.
Probably the most publicly known companies because of their commercial airline manufacturing business, BA is also a DJIA component and like UTX, has a fairly similar matching to the index – although the current P/E and P/B ratios are very high. With a Graham number of 50.97, BA is currently overvalued.

Lockheed Martin Corp (LMT)
Lockheed Martin Corporation, a security and aerospace company, is engaged in the research, design, development, manufacture, integration, and sustainment of advanced technology systems, products, and services for defense, civil, and commercial applications in United States and internationally. LMT is a dividend contender having raised dividends for 11 years in a row, with a 5-yr DGR of 21.2% and a 10-yr DGR of 23.5%.
Lockheed Martin is the highest grosser in the defense sector for the past few years and also counts defense spending as the biggest source of revenue at 95%. LMT is at the top-end of the scale with highest yield, highest payout ratio, highest 5-yr DGR. However, LMT also has the highest amount of debt totaling $6.15B (which is a debt/equity of 1.28). The company will probably not be able to keep up with the massive dividend increases going forward. With a Graham number of 57.28, LMT is currently overvalued.

General Dynamics Corp (GD)
General Dynamics Corporation operates as aerospace and defense company worldwide. Its Aerospace group designs, manufactures, and outfits business-jet aircrafts; provides aircraft services, such as maintenance, repair work, fixed-based operations, and aircraft management services; and performs aircraft completions for aircraft.  GD is a dividend contender having raised dividends for 23 years in a row, with a 5-yr DGR of 10.3% & 10-yr DGR of 13.3%.
GD is right in the middle of the pack for all valuations, but has stood the test of time – with the 23 years of dividend increases and will cross into the dividend champions list in two years, provided they keep the dividend raises coming.

Aerospace & Defense sector ranking based on revenue

Raytheon Company (RTN)
Raytheon Company develops integrated products, services, and solutions in the areas of sensing; effects; command, control, communications, and intelligence; mission support; and cyber and information security worldwide. It operates in four segments: Integrated Defense Systems; Intelligence, Information, and Services; Missile Systems; and Space and Airborne Systems. RTN is a dividend contender having raised dividends consecutively for 10 years; with a 5-yr DGR of 14.4% and 10-yr DGR of 10.4%.
Raytheon’s P/E, P/B, debt level, yield, payout ratio and DGR all are very agreeable and will need a closer look for an investment at current levels.

Northrop Grumman Corp (NOC)
Northrop Grumman Corporation provides systems, products, and solutions in aerospace, electronics, information systems, and technical service areas to government and commercial customers worldwide. The company’s Aerospace Systems segment designs, develops, integrates, and produces manned aircraft, unmanned systems, spacecraft, high-energy laser systems, microelectronics, and other systems and subsystems. NOC is a dividend contender having raised dividends consecutively for 11 years; with a 5-yr DGR of 10.9% and a 10-yr DGR of 12.7%.
Northrop Grumman also seems very attractively valued at current market levels. The company has very agreeable metrics such as P/E, P/B, debt level, yield, payout ratio and DGR.
L-3 Communications Holdings Inc (LLL)
L-3 Communications Holdings, Inc., through its subsidiary, L-3 Communications Corporation, provides command, control, communications, intelligence, surveillance, and reconnaissance (C3ISR) systems; aircraft modernization and maintenance; and national security solutions in the United States and internationally. The company operates in four segments: Aerospace Systems, Electronic Systems, Communication Systems, and National Security Solutions. NOC is a dividend contender having raised dividends consecutively for 11 years; with a 5-yr DGR of 13.8%.
The lowest yielder, but also the lowest payout ratio (at 28.4%) of the group provides for plenty of room for future increases. The company is also just a little higher than the Graham number (115.89) and is currently attractively priced.
For the risk averse investor, you can get exposure to all the stocks mentioned above by buying one of the following ETFs.

  • iShares US Aerospace & Defense ETF (ITA) – MER 0.44%, yield 1.52%
  • PowerShares Aerospace & Defense Portfolio (PPA) – MER 0.66%, yield 0.98%
  • SPDR S&P Aerospace & Defense ETF (XAR) – MER 0.35%,  yield 2.52%
What are your thoughts on the stocks mentioned? Do you own any? What are your thoughts/comments/concerns on them? Leave a comment below.
Full Disclosure: None. My full list of holdings are available here. 

Chatter Around the World – 53

Chatter Around the World is a weekly link update of economics, investing, dividends and personal finance articles that have caught my eye. In these weekly updates, I also capture my blog updates and news related to my holdings.

Sector Quilt

Sector Quilt

Sector quilt updated Jun 30, 2014

New Blog Posts

Let’s dive into the links that caught my attention this week.

Updates from My Portfolio Holdings

General Reads

Dividend Reads

Dividend Stock Analysis

A Frugal Family’s Journey maintains a centralized list of dividend stock analyses from around the community. Be sure to check out the page here.

Have a wonderful weekend.