Should You Buy Agrium Inc. or Potash Corp./Saskatchewan Inc.?

Agrium Inc. (TSX:AGU)(NYSE:AGU) and Potash Corp. /Saskatchewan Inc. (TSX:POT)(NYSE:POT) are hitting new highs. Is one a better bet right now?

The Motley Fool

Agrium Inc. (TSX:AGU)(NYSE:AGU) and Potash Corp. /Saskatchewan Inc. (TSX:POT)(NYSE:POT) are hitting new highs and investors are wondering if they should buy, hold, or sell the stocks.

Let’s take a look at both companies to see if the good times are going to continue.

Agrium Inc.

Agrium just hit an all-time high of $133 per share, and the stock is up more than 17% in the past month. There are several reasons for the strong performance.

Nitrogen production is Agrium’s largest wholesale operation. In the third quarter of 2014, the division enjoyed gross margins of better than 30%, but the company should see even stronger results for Q4 2014 and most of 2015. Natural gas is the primary input cost for the production of nitrogen and natural gas prices are 25% lower right now than they were during the third quarter.

At the same time, Agrium recently completed maintenance work at its nitrogen facilities, which should lead to higher production.

On the potash side, Agrium just finished a large expansion at its Vanscoy site. The upgrade will increase production capacity by as much as 40% once the operation is running at full tilt.

This is good news for investors. The completion of the project means more cash flow will be available for distributions to shareholders. The company recently announced a plan to increase its dividend-payout ratio to as much as 50%. Agrium also plans to buy back up to 5% of its outstanding stock in the next 12 months.

Agrium’s other division is its retail network. The operation delivers a reliable revenue stream that helps offset the volatility that can disrupt the wholesale market.

Agrium pays a dividend of US$3.12 per share that yields about $2.8%. The stock is up 108% in the past five years and trades at about 18 times earnings.

Potash Corp./Saskatchewan Inc.

Potash Corp. is also completing a large expansion at its facilities. The timing is fortuitous for investors because the wholesale potash market is at a pivotal point right now.

Global potash demand hit record levels in 2014 and this year should see another increase, driven by higher sales to Asian markets. Prices are also expected to improve. In September, the world’s largest potash producer, Russia-based Uralkali, said it expects 2015 prices to be as much as 10% higher for fixed contracts with China. The Chinese agreements normally set the benchmark for other global deals.

Uralkali is also at the centre of a large supply disruption. In November, the company shut down one of its mines due to the inflow of salty water caused by a sinkhole. In a December update, the company reported that the sinkhole had doubled in size since its discovery. The mine in question represents about 20% of Uralkali’s production. If the entire mine becomes flooded, the facility could be abandoned.

Potash Corp. pays a dividend of US$1.40 per share that yields about 3.7%. The stock has increased 17% in the past five years and trades at 23 times earnings.

Which should you buy?

Both Agrium and Potash are good long-term bets. Agrium certainly has the better track record for capital appreciation and its integrated business model helps offset some of the volatility that can hit the wholesale market. Potash is more of a pure play on the global potash market and it currently offers a better yield.

At this point, either stock should be a good addition to your dividend growth portfolio, but there could be some volatility in the near term, given the strong price increases in recent weeks.

Buying stocks as they hit new highs is a popular strategy, but investors should also be on the lookout for top stocks that have endured tough times and have turned the corner in their restructuring process.

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 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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