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Potash Corp./Saskatchewan Inc. vs. Agrium Inc.: Which Is the Best Dividend Investment?

Both Potash Corp./Saskatchewan Inc. (TSX: POT)(NYSE: POT) and Agrium Inc. (TSX: AGU)(NYSE: AGU) are great choices for investors looking to benefit from the the long-term growth in global demand for crop nutrients, but there are some key differences between the two companies.

Let’s take a look at both stocks to see if one is a better bet right now for dividend-growth investors.

Potash Corp.

The global wholesale market for potash has been volatile during the past 12 months, but the fundamentals moving forward look very good.

Investors in Potash Corp. watched the shares drop nearly 25% last year when Russian producer Uralkali announced it was ending its trading agreement with Belaruskali. Potash Corp. has since regained most of the losses and the stock has been drifting around the $36 to $40 range for most of this year.

In its Q3 2014 earnings statement Potash said that demand for potash is very strong right now and fourth-quarter shipments are expected to be above the high end of the company’s previous guidance.

Uralkali, the world’s largest potash producer, said global potash demand in 2014 could hit records levels by year-end.

Latin American sales are at an all-time high. China and India are taking large shipments under their attractive 2014 fixed-term pricing agreements, and strong demand in the rest of Asia is driving tender prices higher. This should lead to better deals with China and India when supply contracts are renewed next year.

As 2014 wraps up, Potash Corp. and its investors should expect to see stronger profit margins in 2015. Cash flow available to shareholders should also increase due to lower capital expenditures as Potash Corp. completes a large expansion program.

Potash pays a dividend of US$1.40 per share that yields about 4%. The payout ratio is 88%. Potash Corp. trades at about 16 times forward earnings.

Three years ago the annualized dividend was just 28 cents per share.

Agrium Inc.

Agrium’s integrated business model makes it an attractive option for investors who want to have exposure to both the wholesale and retail markets for crop nutrients. Agrium produces nitrogen, potash, and phosphate for sale to global wholesale customers. The company also operates North America’s largest network of retail locations that sell fertilizers, seed, and crop protection products to farmers.

In the company’s Q3 2014 earnings statement, Agrium reported strong earnings despite some challenges in the retail market and shutdowns at its Vanscoy and Redwater facilities.

The company is completing a $2 billion expansion at the Vanscoy potash mine that will increase total production capacity by 40%. Investors should see a double benefit. Capital expenditures will drop significantly as the project moves from development to operation. At the same time, cash flow will increase as a result of the production growth.

Chuck Magro, Agrium’s President and CEO, said the completion of the major turnarounds at both Vanscoy and Redwater will “deliver significant additional free cash flow” in the coming years.

Agrium just increased its dividend by 4% to US$3.12 per share. The distribution yields about 3% and the payout ratio is 56%. The stock trades at about 13 times forward earnings.

Which should you buy?

Both companies are solid long-term investments but Agrium is probably the better pick at the moment. The company has a lower payout ratio and is still trading at a discount to Potash, even after the recent spike in the stock due to renewed activity by activist investors. The diversified business model also provides some stability to earnings.

PotashCorp. and Agrium Inc. are great picks to start a dividend-growth portfolio. If you are looking to add one more top stock to diversify your holdings, you might want to read the free report discussed below.

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Fool contributor Andrew Walker owns shares of Potash Corp. The Motley Fool owns shares of Potash Corp. Agrium is a recommendation of Stock Advisor Canada.

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