Agrium Inc. (TSX:AGU)(NYSE:AGU) recently blew through the $130 mark and investors are wondering if it is time to take some profits, hold and wait, or double down.
Let’s take a look at the stock and see if it deserves to be in your portfolio right now.
Dividend growth
Agrium got a nice pop last week when it announced it is increasing the percentage of free cash flow it plans to return to shareholders. This shouldn’t come as a surprise to investors who have been following the company’s progress during the past two years.
Agrium just wrapped up a major expansion program at its Vanscoy potash mine. The project will increase production at the site by as much as 40%. The move from development to operation means a large chunk of free cash flow is now available for other uses.
On January 22, Agrium said it plans to buy back as much as 5% of its outstanding stock in the next 12 months. The company is also increasing its target dividend-payout ratio. Investors will now see as much as 50% of free cash flow returned as dividends.
Agrium currently pays a dividend of US$3.12 per share.
Nitrogen profits
Nitrogen margins are essentially determined by the price of natural gas, which is the core input cost. Investors should see strong results from the division as natural gas prices have plummeted in recent months. The current price of $3.00/MMBtu is 25% lower than Agrium’s third quarter 2014 average natural gas cost of $4.01/MMBtu. Last January, natural gas prices were closer to $5.00/MMBtu.
Agrium’s nitrogen group had an average realized sales price of $438 per tonne in Q3 2014. Gross margins were $105 per tonne.
Potash markets
Agrium is completing its potash expansion at a perfect time. Global potash demand hit a record in 2014 and wholesale prices are expected to increase through 2015.
In a recent statement, Agrium’s CEO, Chuck Magro, said he expects potash demand to be higher in China and India this year. Negotiations are still ongoing for large wholesale delivery to the Asian countries. In September, Russia-based Uralkali said it expects its 2015 prices to be about 10% higher than those negotiated last year.
Supply concerns are also impacting the market this year as Uralkali has shut down a mine that accounts for 20% of its potash production. Salty water has been entering the mine through a large sinkhole. In December, Uralkali said the sinkhole had almost doubled in size since being discovered in mid Novemeber.
Retail strength
Agrium’s extensive retail division continues to deliver strong results and provides a strong hedge against fluctuating prices in the wholesale markets.
Should you buy?
Agrium is in a sweet spot right now. Investors should see strong dividend growth in the next few years and the share buybacks should help fan the tailwinds behind the stock.
The shares are already up more than 25% in the past three months but the move could continue, especially as money fleeing the energy sector looks for a new home in companies with strong dividend payouts.
