Why Potash Corp./Saskatchewan and Agrium Inc. Are Dividend Growth Giants

Here’s why massive dividend hikes at Potash Corp./Saskatchewan Inc. (NYSE:POT) (TSX:POT) and Agrium Inc. (NYSE:AGU) (TSX:AGU) are just the beginning.

| More on:
The Motley Fool

Exciting things are on the horizon for investors who own shares of fertilizer producers Potash Corp. of Saskatchewan (NYSE:POT) (TSX:POT) and Agrium Inc. (NYSE:AGU) (TSX:AGU).

Tough times

The global fertilizer market has been difficult over the past year as potash prices dropped by nearly 25% from $400 per tonne to the $300 range.

The break-up of the potash marketing venture between Russian producer OAO Uralkali and Belarusian producer Belaruskali is to blame for the price drop and global potash wholesalers have scrambled to adjust output and manage costs to accommodate the lower margins.

Potash Corp. and Agrium Inc. have battled back and the stars are now aligning for some serious free cash flow growth at both companies.

Here are three reasons why I think Potash Corp. and Agrium Inc. are going to reward shareholders with big dividend increases.

1. Record demand

Uralkali said in an August 28 statement that it expects North American potash demand to equal the record levels set in 2010.

The report estimates that North America may use as much as 10 million tonnes of potash in 2014. This is a significant increase from the previous estimate of 9.2 million tonnes.

Crop yields in North America this year are hitting all-time highs and farmers will be comfortable spending more money on crop nutrients to assure the fields are ready for next year’s production.

Uralkali said potash demand in North America in the first half of the year was up 30% compared to 2013. Demand growth is also strong in China and Brazil and Uralkali confirmed its belief that 2014 global demand for potash could hit record levels by year-end.

2. Increasing potash prices

The bottom appears to be in for the potash market. China signed an agreement with Uralkali last January for $305 per tonne and Uralkali recently said it expects the renewal price in 2015 to be about 10% higher.

In the spring, India signed contracts with both Uralkali and North American trading group Canpotex for $322 per tonne. Potash Corp., Agrium, and The Mosaic Company (NYSE:MOS) own Canpotex.

3. Increases in production

Both companies are completing an era of multi-year capital expenditures on expansion projects.

Potash Corp. has the capability to increase production as prices move higher and Agrium is wrapping up an expansion at its flagship Vanscoy mine that will add up to 40% capacity in its potash production over the next few years.

Price strength should continue in 2015 and 2016.

The bottom line

The increased production combined with improving market demand and higher prices for potash should produce significantly higher cash flow moving forward.

As the capital-intensive projects move into the production stage, the amount of free cash flow available for dividend increases should grow.

Potash Corp. currently pays a dividend of US$1.40 that yields about 4%. The company has increased its dividend by 500% in the past three years.

Agrium Inc. pays a dividend of US$3.00 that yields about 3%. The company has increased its dividend by more than 1360% in the past three years.

I think both Potash Corp and Agrium will continue their recent trend of giving back increasing amounts of money to their shareholders. The dividend hikes could continue to be extremely high.

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.

More on Dividend Stocks

Businessmen teamwork brainstorming meeting.
Dividend Stocks

1 Magnificent Dividend Stock Down 15% to Buy and Hold Forever

Enbridge is off the 12-month lows but still trades at a large discount to its 2022 high.

Read more »

Increasing yield
Dividend Stocks

My Top 5 Ultra-High-Yield Dividend Stocks to Buy in May

If you’re looking to build a passive-income stream, these five dividend stocks should be on your radar.

Read more »

Payday ringed on a calendar
Dividend Stocks

A 10.6% Dividend Stock That Provides Monthly Cash Payments

A dividend stock with a mouth-watering yield providing monthly cash flow streams.

Read more »

Dividend Stocks

The Top Canadian REITs to Buy in May 2024

These three REITs have envious growth potential and trade cheaply today, making them three of the top Canadian stocks to…

Read more »

Young woman sat at laptop by a window
Retirement

Why I Can’t Stop Buying Shares of This Magnificent High-Yield Stock in My Retirement Account

This utility is an excellent retirement stock, providing juicy income, income growth, and wealth creation for the long haul!

Read more »

A close up image of Canadian $20 Dollar bills
Dividend Stocks

Passive Income: How Much to Invest to Earn $1,000 Each Year

If you want the right passive-income producer, you want historical performance and future growth, and this dividend stock provides exactly…

Read more »

Cogs turning against each other
Dividend Stocks

1 Magnificent TSX Dividend Stock Down 9% to Buy and Hold Forever

A high-yield TSX dividend stock is a buying opportunity for long-term investors.

Read more »

money cash dividends
Dividend Stocks

2 Under-$10 Dividend Stocks I’d Buy Right Now

Here's why low-cost dividend stocks such as Decisive Dividend should be part of your shopping list in 2024.

Read more »