Agrium Inc – My Pick in the Fertilizer Sector

Agrium

Agrium Inc (AGU) is a fertilizer giant that produces, markets, and distributes crop nutrients, crop protection products, seeds, and merchandise. The company operates in two segments: Retail and Wholesale. Agrium has a more diversified approach to the fertilizer industry, and offers products targeting the three main types – Nitrogen, Phosphate and Potash.

Agrium is the second largest company in the space, and is based in Canada, where half the world’s Potash reserves are to be found. However, it is focused on other fertilizers in the space as well – Nitrogen and Phosphate. This has allowed the company to grow revenues and navigate the waters well as Potash prices collapsed.

Is the stock a buy currently? Continue Reading Here >>

Sector Overview – Fertilizer Companies

This article provides a sector overview of the Fertilizer Companies. Fertilizer companies are an excellent investment vehicle for investors looking in the agricultural space. The world population continues to grow and with that comes the added stress on resources such as arable land, water table, pests and land overuse. In order keep up with the demand of feeding the world, farmers have had to resort to using genetically modified crops coupled with liberal use of fertilizers.

My previous articles in the Sector Overview garnered plenty of interest as you readers found it valuable. So, without further ado, here’s a sector overview for the Fertilizer Companies.

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Agrium Inc (AGU) Dividend Increase

Agrium Inc (AGU) (AGU.TO) released it quarterly results today and with that announced an increase in its quarterly dividends by 12%. The quarterly dividend rises from US$0.78 to US$0.875. Agrium, even though a Canadian company, pays its dividends in US$ and for holders of the TSX listed stock, the dividend amount is converted on record date. All numbers following are in US$. This is the sixth consecutive year of dividend increase from Agrium and came as a bit of a surprise to me as the last increase was in Nov 2014 – with a 4% increase. The new dividend amount will be paid on Jul 16, 2015 to shareholders of record on Jun 30, 2015.

Agrium

From the earnings release statement:

  • First quarter adjusted net earnings of $19-million or $0.12 per share (see page 2 for adjusted net earnings reconciliation)
  • Strong nitrogen performance contributed to Wholesale gross profit of $234-million compared to $171-million in Q1 2014
  • Retail gross profit of $371-million compared to $387-million in Q1 2014, impacted by slow start to U.S. spring season, shifts earnings into Q2
  • Announced a 12 percent increase to dividend, now $3.50 per share on an annualized basis
  • Repurchased $75-million or approximately 712,000 shares since the beginning of April
  • First half guidance range of $4.75 to $5.25 diluted earnings per share and updated 2015 annual guidance range narrowed to $7.00 to $8.25 diluted earnings per share

Agrium’s first quarter results were impacted by a late start to the spring season in the U.S. this year. All indications are that Agrium will deliver strong second quarter results on solid crop input demand now that the spring application season is fully underway and given we have made excellent progress ramping up production from our expanded potash facility over the past month. We continue to position our operations and asset mix to support higher cash flow and capital returns over time irrespective of any short term headwinds. The increase in the dividend and recent share buy-back activity demonstrates our commitment to this strategy and to our shareholders,” commented Chuck Magro, Agrium’s President and CEO.

The annual dividend rises from $3.12 per share to $3.50 per share. My portfolio consists of 20 shares of Agrium, increasing my dividends from $62.40 to $70, an increase of $7.60.

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.