Which Is a Better Stock for Dividend Investors: Agrium Inc or Potash Corp./Saskatchewan?

Agrium Inc (TSX:AGU)(NYSE:AGU) and Potash Corp./Saskatchewan (TSX:POT)(NYSE:POT) are both first rate operators that crank out reliable dividends.

Fertilizer stocks like Agrium Inc (TSX:AGU)(NYSE:AGU) and Potash Corp./Saskatchewan (TSX:POT)(NYSE:POT) are popular among dividend investors… for good reason.

Despite new technology, Mother Nature is approaching her limits. Top soil is eroding. Water tables are nearly depleted. Global warming is wreaking havoc on food production.

And the situation is only getting worse…

According to the Economist, we are going to need to produce more food over the next 40 years than humanity’s total output in the previous 10,000 combined. To grow more crops on less land, farmers will need ever greater quantities of fertilizer. That’s why producers like Agrium and Potash/Corp are raking in the cash hand over fist.

But before you slap your money down, there’re also some key differences that need to be considered. Let’s see how the two stocks stack up on a range of measures.

1. Dividend yield: No contest here. Potash/Corp yields 4.1%, which is almost double Agrium’s 2.7% payout. So, if you’re looking for current income, the Saskatchewan miner is your best bet. Winner: Potash/Corp

2. Dividend history: Of course, we have to dig a little deeper than that to judge quality. Potash/Corp has one of the most dependable dividends in Canada, given that the company has mailed a cheque to investors every year since 1989. Agrium has a long history of rewarding shareholders, as well. However, the firm’s dividend history only goes back to 2002. Winner: Potash/Corp

3. Dividend growth: To offset inflation, growth in dividends is just as important as the current payout itself. Agrium has increased its distribution at a stunning 30% compounded annual clip over the past decade. That’s incredible, but it’s not as good as Potash/Corp. The company’s dividend growth rate came in at 37% annually over the same period. Winner: Potash/Corp

4. Earnings growth: Of course, future dividend hikes depend on growing profits. Based on analyst estimates compiled by Reuters, Agrium’s earnings per share are projected to grow at a 5% compounded annual rate over the next five years. But as impressive as that is, Potash/Corp’s earnings are expected to grow at an even faster 10% clip each year. Winner: Potash/Corp

5. Valuation: Agrium has been one of the hottest securities on the Toronto Stock Exchange, up more than 40% over the past six months. Yet in spite of the run, shares are still reasonably priced at 21 times next year’s profits. Potash/Corp, in contrast, is much more expensive at 27 times forward earnings. That could make the stock vulnerable to a selloff if results disappoint. Winner: Agrium

6. Margins: Agrium isn’t just a fertilizer producer. The company also breaks-the-bulk as a retailer. This model allows Agrium to maximize its profits from wholesale operations through special arrangements with the company’s retail division. Wholesale-only companies like Potash/Corp, in contrast, don’t have these levers to move product. Winner: Agrium

Here’s the final verdict…

Agrium and Potash/Corp are both first rate operators that crank out reliable dividends. This is why I have recommended both here at the Motley Fool Canada. That said, Potash/Corp’s taller yield and faster growth gives it a slight edge in my books (though I’m certainly willing to be persuaded by Agrium bulls).

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 Robert Baillieul has no position in any stocks mentioned. The Motley Fool owns shares of PotashCorp. Agrium is a recommendation of Stock Advisor Canada.

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