3 Reasons to Buy Agrium Now

Investors should take a hard look at these positive developments at Agrium.

| More on:
The Motley Fool

Agrium (TSX: AGU)(NYSE: AGU) is a great company for investors looking to benefit from the growing demand for food.

The world’s population continues to rise at an alarming rate. At the same time, valuable farmland is routinely being turned into subdivisions and shopping malls.

Agrium produces and retails the three key nutrients farmers use to improve crop yields: nitrogen, potash and phosphate.

Here are three reasons why I think now is a good time to buy Agrium.

1. Diversified business model

Compared to other companies in the agriculture space, namely PotashCorp (TSX: POT)(NYSE: POT) and Mosaic (NYSE: MOS), Agrium’s diversified business model provides investors with a hedge against the volatile tendencies of the wholesale side of the crop nutrients industry.

Agrium is a vertically integrated business and sells its products both wholesale and through its network of retail locations.

The retail division represents about 43% of the company’s earnings, providing investors with more stability because it isn’t heavily affected by big price changes in the global potash market.

Currently, Agrium is the largest direct-to-grower distributor of seed, crop nutrients and crop protection products in North America. It also has an extensive network in Australia.

Agrium’s recent acquisition of Viterra’s 200 sales outlets continues to add revenue and synergies to the retail division.

2. Potash and nitrogen production

Agrium is expanding its Vanscoy potash operation by a million tonnes. The increase is expected to come on line at the end of 2014, boosting Agrium’s potash production by more than 40%. The $1.8 billion project will add significantly to earnings moving forward.

Recent potash deals with China and India have put a floor under the market at $300 per tonne. This will calm the nerves of investors who have been sitting on the sidelines looking to take a position in the potash producers, including Agrium. Global potash demand is trending higher and prices should drift upwards through 2015.

Nitrogen represented 34% of Agrium’s gross profit in 2013. Natural gas is the key cost component for nitrogen production and the price spike in Q1 2014 had an impact on margins. Production costs are likely to be lower in the second half of 2014 as natural gas prices decrease. Natural gas closed at $3.95 per mmBtu last week. This is the first time it has been under $4 since early December of last year.

3. Increasing dividends and share buybacks

Agrium has increased its annual dividend from $0.11 per share to $3 per share in just the past three years. The company also plans to buy back up to 5% of its outstanding shares before the end of Q1 2015.

With the major capital expenditures for the Vanscoy expansion nearly completed, Agrium should have ample free cash flow available to boost the dividend.

The bottom line

Agrium’s diversified business structure will allow it to weather rough times in the wholesale markets for its products.

With the new potash production, lower natural gas prices and improving synergies in the retail group, I think Agrium is set to reward investors as it transitions out of a tough wholesale environment.

Potash and nitrogen prices should trend higher in the second half of 2015, and the current 3% dividend is a good incentive to get paid while you wait for better times.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Andrew Walker has a position in PotashCorp. The Motley Fool owns shares of PotashCorp. Agrium is a recommendation of Stock Advisor Canada.

More on Investing

Hourglass projecting a dollar sign as shadow

New Investor? If You Do Nothing Else With Stocks, Learn This Lesson

Time is the most powerful thing on an investor's side. Here are two powerful ways to use it.

Read more »

lab worker inspects test tubes
Dividend Stocks

Warren Buffett’s Buying This Passive Income Stock

Berkshire began buying this chemical company earlier this year and hasn't stopped.

Read more »

Arrowings ascending on a chalkboard
Tech Stocks

Why I Think Nuvei Stock Has Market-Beating Potential

Given its growth initiatives, expanding addressable market, and attractive valuation, I believe Nuvei has the potential to outperform the broader…

Read more »

Various Canadian dollars in gray pants pocket
Dividend Stocks

Need Passive Income? Turn $5,000 Into $23.85 Every Month

If you're looking for passive income that comes in like a paycheque, this dividend stock provides that to you along…

Read more »

A worker drinks out of a mug in an office.
Metals and Mining Stocks

5 Things to Know About Nutrien Stock in December 2022

Trading at heavily depressed multiples, Nutrien stock is a great opportunity, as it delivers solid financial results and an optimistic…

Read more »

A shopper makes purchases from an online store.
Tech Stocks

Shopify Stock Rose 15% in November: Is it a Buy Today?

Shopify (TSX:SHOP) stock rallied 15% this month but is still down 69% year to date, so should investors worry that…

Read more »

Man holding magnifying glass over a document

The 3 Most Oversold TSX Stocks to Watch Before 2023

Many oversold stocks are merely victims of market circumstances and potentially profitable bargains when they seem downtrodden.

Read more »

Silver coins fall into a piggy bank.
Dividend Stocks

A TFSA Contribution Room of $88,000 and 1 Dividend Aristocrat Can Make You $172,330 Richer

A high-yield Dividend Aristocrat in the energy sector is a suitable holding for Canadians with $88,000 available contribution rooms in…

Read more »