Agrium Inc. (TSX:AGU)(NYSE:AGU) is hitting new all-time highs and investors are wondering if the stock is still a good buy at the current price.
Here are the reasons why I think Agrium is worth adding to the watchlist right now.
1. Dividends and share buybacks
Agrium’s shares have been on a tear since the middle of December, but the stock really got a shot in the arm when it announced plans to increase the percentage of free cash flow it will allocate to dividend payments and share buybacks.
Why is Agrium being so generous?
Agrium just completed a multibillion-dollar expansion at its Vanscoy potash plant and the addition will boost capacity by as much as 40% once the facility hits its full output potential. As the company shifts from the development stage to production, the amount of free cash flow that is available for distributions will increase substantially.
The new payout target is now set at 40% to 50% of free cash flow (net of sustaining capital), which still gives the company flexibility to make acquisitions or invest in other facility upgrades while rewarding investors.
Agrium also announced plans to buy back as much as 5% of its outstanding shares during the next 12 months.
Agrium’s CEO, Chuck Magro, made the following statement:
“We expect our free cash flow generation to increase significantly as we complete our major production capacity expansion projects for nitrogen and potash this year. We believe that the higher payout ratio strikes a balance between returning significant capital to shareholders, while maintaining our core assets and flexibility for growth. The Bid provides an additional avenue to return capital to shareholders, while we also intend to increase our dividend in step with the growth in free cash flow”.
2. Nitrogen margins
The production of nitrogen is Agrium’s largest operation. Nitrogen margins are primarily determined by the price of natural gas, which is the main input cost.
Natural gas prices have fallen off a cliff in the last three months as strong shale production and mild weather have resulted in storage levels that are 25% higher than this time last year.
Agrium’s average cost for 2014 was about $4.00 per million British Thermal Units (MMBtu). Natural gas prices are now running at US$2.80/MMBtu.
The nitrogen division should deliver strong earnings through most of 2015 as gas prices are expected to remain weak.
3. Strong retail operations
Agrium is a unique company in the fertilizer space because it has both wholesale and retail operations. The retail division includes more than 1,250 stores that market and distribute seed, nutrients, and crop protection products to growers located in the U.S., Canada, Australia, and Brazil.
The retail side of the business continues to grow and now provides a predictable revenue stream that helps offset volatility on the wholesale side.
Should you buy?
Agrium’s stock has enjoyed a big surge in the past few months but the long-term prospects suggest the shares have more room to run. Dividends have increased from US$0.11 per share in 2008 to US$3.12 per share today and that trend is likely to continue. Capital expenditures are expected to fall in the next two years and increased production will drive revenues higher.
