Ag Growth International (TSX:AFN) is Canada’s leading manufacturer of agricultural equipment. In a world of ever-rising populations, Ag Growth looks to be in the right business.
While the need to increase food production should continue to provide long-term growth opportunities, the company has also been diligent about returning cash to shareholders. Since 2004, Ag Growth hasn’t missed a dividend payment. Today, its dividend yield stands at 4.2%.
Looking ahead, the company should have plenty of opportunities to not only sustain this income stream but grow it over time.
Here’s why Ag Growth is the ideal income stock for any RRSP investor looking for low-volatility stocks that provide reliable income.
Agriculture is infrastructure intensive
To support the world’s agriculture companies, there needs to be a massive amount of infrastructure. That includes facilities to store, blend, mix, convey, condition, process, and protect billions of tonnes of agriculture inputs and crops every day.
This is where Ag Growth specializes.
Ag Growth designs, manufactures, and sells equipment that stores and processes a wide variety of agricultural materials. Its businesses cover five main areas: grain, fertilizer, food, feed, and seed. Its products include items like portable grain belt conveyors, storm seed treaters, bulk weigh hoppers, and pneumatic conveying systems.
While you not be familiar with the products listed above, nearly every agricultural producer relies on them to do business. They represent critical components for the agricultural industry to function. As long as humans continue to grow food, Ag Growth will be in business.
Transitioning to an international powerhouse
Over the past five years, Ag Growth stock has returned roughly 0% in capital gains, leaving investors with a 4% dividend as the only source of positive returns. While this return profile may not be impressive, there’s reason to believe that the market hasn’t fully rewarded the company for years of hard work.
For example, from 2013 to 2017, sales more than doubled. Profitability followed suit, with EBITDA rising from $64 million to $123 million over the same period. The most interesting part of the story, however, is Ag Growth’s nascent international penetration.
In 2011, the company generated $55 million in international sales, comprising just 15% of its total revenues. By 2017, international sales grew to $152 million, or 20% of total revenues. Recently, management noted that the company’s international sales backlog “is currently at record levels,” with meaningful projects ramping up in both Europe and South America.
Because this story of international growth is just beginning, the market hasn’t fully rewarded the company’s stock price. This should change as sales traction continues.
A reliable dividend with room for growth
Impressive multi-year results have improved the company’s dividend-payout ratio from around 70% to under 50%. So, even with less than half of earnings being paid out, the stock still yields more than 4%.
In recent years, management has dedicated a large amount of cash flow and resources towards growing international operations. Now that it has a foothold to scale with, expect increasing amounts of cash to be dedicated to growing the dividend even further. By 2020, this stock could yield 5% or more based on current prices.
With an attractive payout ratio and room for growth, Ag Growth should be a consideration in all income-based portfolios, especially in tax-advantaged vehicles like RRSPs.
