Agrium Inc. (TSX:AGU)(NYSE:AGU) has been a fantastic company to own for the past five years and the recent pullback in the stock is giving new investors a chance to get in before the rally continues.
Here are the reasons why I think long-term investors should consider adding Agrium to their portfolios right now.
1. Fertilizer demand
As one of the world’s largest producers and distributors of fertilizer products, Agrium is well positioned to capitalize on an alarming trend.
The world population currently stands at about seven billion people. That number is expected to be as high as 11 billion by 2050. As the world welcomes more and more hungry mouths, the amount of land available to grow crops to feed them is constantly shrinking.
Agrium expects annual consumption of grains and oilseeds to increase by 1.6 billion tonnes in the next 15 years. In order to meet the demand, farmers will need to use an additional 58 million tonnes of nitrogen, phosphate, and potash.
Growers will also have to spend an additional $3 billion on seed and crop protection products.
Agrium is well positioned to benefit from this trend.
2. Integrated business model
Agrium stands out among its peers because it has operations in both the wholesale and retail side of the agriculture business.
Agrium’s wholesale division produces nitrogen, potash, and phosphate for sale to the global market. These three products are key to the enhancing crop yields. In fact, without the use of fertilizers, farmers would only produce about half as much food.
Wholesale earnings are susceptible to large fluctuations. For example, Potash prices dropped by 25% in 2013 when two of the world’s largest producers decided to end a marketing agreement. The companies then started a global battle for market share, which has slowed the rate of price recovery.
Fortunately for investors, Agrium also operates the world’s largest agriculture solutions retail operation. With a network of stores that spans North America, South America, and Australia, Agrium supplies more than 500,000 growers with seed and crop protection products.
The combination of both the retail and operations is unique in the sector, providing investors with a balanced income stream.
3. Production growth
Agrium just completed the tie-in of a major expansion at its Vanscoy potash facility. The project will add as much as 40% to Agrium’s potash capacity at a time when potash demand is hitting record levels and prices are beginning to improve.
As the project shifts from development to production, investors should see a wave of free cash flow headed into their pockets.
Agrium is also expanding its Borger nitrogen facility located in Texas. The US$720 million projected will expand production by about 30% and should be completed in the second half of 2015.
This is important for investors because Agrium is one of the world’s lowest cost producers of nitrogen. Natural gas is the prime input product in the production process and gas prices in North America are significantly lower than anywhere else in the world.
4. Dividend growth and share buybacks
Agrium is a dividend machine. The company just increased the payout by 12% to US$3.50 per share, which yields about 3.3% The distribution has increased significantly in recent years and investors should see the trend continue as the company wraps up its major capital projects.
Agrium also has an aggressive share repurchase program.
