Canadian Potash Companies Had a Nice 2017: Time to Trim Profits

Can Nutrien, the combined Potash Corporation of Saskatchewan Inc. (TSX:POT)(NYSE:POT) and Agrium Inc. (TSX:AGU)(NYSE:AGU) firm, shoot even higher in 2018?

Two of Canada’s largest potash firms, Potash Corporation of Saskatchewan Inc. (TSX:POT)(NYSE:POT) and Agrium Inc. (TSX:AGU)(NYSE:AGU), have both seen their share prices rise in 2017 (by 6% and 14%, respectively). While these companies have certainly not been the “home runs” other highly touted companies had last year, by taking an average of these two companies, we still come out to double-digit annual returns. That’s not too shabby at all.

The question of whether the rally has just begun for these two companies or if the party is only getting started pre-consummation of the marriage of the two potash juggernauts (the joined company will be called Nutrien and begin trading this month) remains to be seen. One thing is certain, however: while I called Potash Corp. one of my top picks for 2017, it has certainly fallen off the list for 2018 for a number of reasons.

Supply and demand fundamentals not likely to improve in 2018

In general, it is true that the commodities market remains a China-driven market; with global demand for commodities such as potash largely being driven by one or two countries (India is a big player in this space), investors will be closely watching how the Chinese and Indian governments manage financial stimulus in 2018.

Given the fact that many analysts believe commodities markets may actually be as much as 30% overvalued due to the fact that the broader commodity-related sector has been propped up by massive Chinese stimulus in recent years, right now may not be the time to bet on a resurgence in Potash Corp. (or Nutrien) this year. Potash prices have continued to decline in 2017, and the overall forecast for 2018 doesn’t look too peachy for value investors hoping for a continued rebound in this sector, as new supply is expected to hit the market in the near to mid-term.

Nutrien merger unlikely to deliver real accretive synergies immediately

While a small percentage of the promised synergies from the Potash Corp.-Agrium merger may be possible to attain in the near term (transferring production from higher-cost facilities to lower-cost operations, etc.), achieving real long-term synergies may be easier said than done for the combined entity, given the relative lack of overlap between the two operations. While the more vertically integrated firm will boast even greater potash production and benefit from improved sales channels/distribution, it is unclear whether the whole will be greater than the sum of the parts, so to speak.

With every high-impact merger comes significant uncertainty, and I’m not 100% sold on the synergy argument in this case.

Bottom line

Nutrien is an interesting long-term play for investors looking to ramp up exposure to commodities; that said, better options in the commodities space exist that may provide greater upside in the near to medium term than Nutrien.

Stay Foolish, my friends.

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 Chris MacDonald holds no position in any stocks mentioned in this article. Agrium is a recommendation of Stock Advisor Canada.

More on Dividend Stocks

ways to boost income
Dividend Stocks

1 Excellent TSX Dividend Stock, Down 25%, to Buy and Hold for the Long Term

Down 25% from all-time highs, Tourmaline Oil is a TSX dividend stock that offers you a tasty yield of 5%…

Read more »

Start line on the highway
Dividend Stocks

1 Incredibly Cheap Canadian Dividend-Growth Stock to Buy Now and Hold for Decades

CN Rail (TSX:CNR) stock is incredibly cheap, but should investors join insiders by buying the dip?

Read more »

bulb idea thinking
Dividend Stocks

Down 13%, This Magnificent Dividend Stock Is a Screaming Buy

Sometimes, a moderately discounted, safe dividend stock is better than heavily discounted stock, offering an unsustainably high yield.

Read more »

Canadian Dollars bills
Dividend Stocks

Invest $15,000 in This Dividend Stock, Create $5,710.08 in Passive Income

This dividend stock is the perfect option if you're an investor looking for growth, as well as passive income through…

Read more »

A Canada Pension Plan Statement of Contributions with a 100 dollar banknote and dollar coins.
Dividend Stocks

3 Compelling Reasons to Delay Taking CPP Benefits Until Age 70

You don't need to take CPP early if you are receiving large dividend payments from Fortis Inc (TSX:FTS) stock.

Read more »

A worker overlooks an oil refinery plant.
Dividend Stocks

Better Dividend Stock: TC Energy vs. Enbridge

TC Energy and Enbridge have enjoyed big rallies in 2024. Is one stock still cheap?

Read more »

Concept of multiple streams of income
Dividend Stocks

Got $10,000? Buy This Dividend Stock for $4,992.40 in Total Passive Income

Want almost $5,000 in annual passive income? Then you need a company bound for even more growth, with a dividend…

Read more »

Investor reading the newspaper
Dividend Stocks

Emerging Investment Trends to Watch for in 2025

Canadians must watch out for and be guided by emerging investment trends to ensure financial success in 2025.

Read more »