Agricultural stocks have a reputation for being boring, stodgy investments. Agrium Inc (TSX:AGU)(NYSE:AGU) shareholders would beg to differ.
Buoyed by rising sales and profits, the company has boosted its dividend at a 30% compounded annual clip over the past decade, during which time the payout grew more than 14-fold. And those hikes are about to get even bigger. Last month, management announced they have increased their target dividend payout ratio to 40% to 50% of free cash flow, which is a boost from the previous target of 25% to 35%.
Admittedly, the stock’s 2.9% yield isn’t high enough to whet the appetite of some income investors. But given the company’s solid growth prospects, the dividend will almost certainly continue to rise. While the stock isn’t as cheap as it was, Agrium is still poised to deliver solid returns.
The company has several things going for it: a lower Canadian dollar and cheaper natural gas prices are helping margins; a strong spring growing season is expected for farmers across North America; and huge growth in fertilizer demand from countries like China, India, Brazil, and other emerging markets is supporting fertilizer prices.
In addition to all of this, Agrium is in the final year of its expansion program. This is expected to increase the company’s production capacity, specifically potash and nitrogen, by 20% over the next two years.
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Agrium’s third-quarter results, released on November 4, showed these investments are starting to pay off. Sales grew 4% year-over-year to US$2.92 billion. Earnings from continuing operations surged 14% from the same time last year to US$91 million or US$0.63 a share. Falling commodity costs also helped gross margins jumped by an impressive 40 basis points to 22.8%.
“Agrium’s business once again proved resilient delivering solid results this quarter.” company President and CEO Chuck Magro said in a press release, “We are confident of our ability to generate significant cash flow in the future and we maintain a positive long-term outlook for the agriculture industry.”
Looking further out, Bay Street expects Agrium to grow earnings per share between 7% and 8% annually over the next five years, citing international expansion, turnarounds at the Vanscoy potash and Redwater nitrogen facilities, and strong demand support for its key products. That should translate into plenty of dividend hikes, too.
Still, some analysts say shares are too rich for their taste. The stock has gained about 39% since mid-October, compared with a 2% total return for the S&P/TSX Composite Index over the same time. Since I first wrote about the company last May, Agrium shares have returned 52%, including dividends.
Here’s the thing; in spite of the stock’s run, shares are only priced at a modest 12 times forward earnings. This is slightly below the fertilizer peer group average and the company’s long-term norms.
All said, Agrium offers a solid dividend at a cheap price. That’s why this firm deserves a spot in your portfolio.
