Agrium Inc. (TSX:AGU)(NYSE:AGU) is on the rise again and new investors are wondering if this is the start of another big run.
Industry trends
Agrium is the world’s largest retailer of seed and crop protection solutions as well as a major player in the wholesale crop-nutrients market.
Experts say there are seven billion people on the planet right now. By the year 2050, that number could hit 11 billion. That’s a lot of extra mouths to feed, especially when suburban housing developments and big box shopping centres continue to gobble up valuable farmland.
In the next 15 years, Agrium says the annual consumption of oil seeds and grain could increase by 1.6 billion tonnes. To meet that demand farmers will use an additional 58 million tonnes of potash, nitrogen, and phosphate on their land and spend an additional $3 billion on seed and crop protection products.
That’s good news for Agrium and its shareholders.
Integrated business model
Agrium is a unique play in the agriculture sector because it owns both wholesale and retail operations.
The wholesale business sells nitrogen, potash, and phosphate to global buyers. This market is dominated by a handful of large players and marketing cartels. Market-share battles often erupt and that can impact prices and profit margins. For example, potash prices dropped 25% two years ago and are just starting to recover on the back of strong global demand. In fact, worldwide potash sales hit a record 61 million tonnes in 2014.
Nitrogen margins depend on the price of natural gas, which is the main input cost. North American natural gas is abundant and cheap, which puts Agrium in a great position to compete on the global market because it is a low-cost producer.
The retail operations offer investors a steady and predictable revenue stream that helps offset the volatility that can hit the wholesale side of the business.
Agrium sells seed and crop protection products to more than 500,000 farmers located in North America, South America, and Australia.
Production growth
The company is in the process of wrapping up a series of capital-intensive expansion projects. Agrium’s Vanscoy potash expansion is now complete and will add as much as 40% to the company’s output once the facility is running at full capacity. Agrium is also boosting capacity at its Borger nitrogen plant in Texas.
Dividend machine
This is a great time to be an Agrium shareholder because the transition from development to production on the major capital programs means investors should see much higher free cash flow.
Agrium recently increased the distribution by 12% and currently pays a dividend of US$3.50 per share that yields about 3.2%.
As capital costs decrease and output ramps up, cash flow available for payouts should rise significantly in the next few years.
If you are looking for a dividend-growth pick that you can simply buy and sit on for 20 years, Agrium is a solid choice.
