After Nutrien (TSX: NTR)(NYSE: NTR) recently announced that it will temporarily reduce production amid weakening industrial demand for potash, some shareholders may have found themselves tempted to engage in a drawdown of their own. However, here’s why it could soon be the perfect time to buy this popular wide-moat play for consumer staples exposure.
What’s eating Nutrien right now?
Beginning November, Nutrien plans to take a temporary time-out at its mines in Allan, Lanigan, and Vanscoy. Global demand for potash, a major agricultural input, has been weak lately, and Nutrien was down a point and a half on average over the past week. The world-class potash miner and agri supplies retailer is a bellwether for the industry, making its share price a de facto indicator of sentiment in the field.
Back in spring, rising potash prices had investors in a bullish mood. However, Nutrien stated last month that it would be briefly curtailing its operations after a sluggish summer. Wet weather in the U.S. was among the driving factors that led to reduced demand, which also prompted Nutrien to lower its earnings outlook in July.
Why buy? A 3.7% dividend yield should be reason enough to stash the world-class potash producer in a TFSA, RRSP, or other long-term stock portfolio. The stock also represents one of the widest of economic moats to be found anywhere on the TSX and is classically defensive as a strategic consumer staples play. Underpinning this is the fact that the potash outlook for 2020 remains strong, with production set to ramp up again after the temporary reduction.
Nutrien is a defensive choice for both income and growth
With the rise of precision farming has also come a greater ability to pinpoint growth in inputs. For instance, over the next four years, the market for potash could expand by 4% over the next four years. Production efficiency is attracting funding at the government level — for instance, from nations of the Asian Pacific. Indeed, the APAC region is likely to account for over half of the forecast growth in potash demand.
And as a primary input that directly feeds into a wide range of essential consumer staples, potash counts as a cornerstone of defensive investment. In fact, the attraction of capital appreciation alone makes this stock a buy for wide-moat investors eyeing increasing uncertainty in the markets, while its moderately portioned dividend yield closes the deal.
In short, Nutrien is currently a value opportunity in a potentially explosive sector. It’s defensive, satisfies an income-based investment strategy, and commands an impressive position as the global market leader for potash, sitting on a +20 million tonne capacity spread over six mines in Saskatchewan.
The bottom line
Precision farming, a methodology which enhances efficiency of traditional farming techniques to improve crop yield and quality, is becoming a major growth trend in the agricultural industry. With market leaders such as Nutrien poised to capitalize on this growth, the current slowdown makes its stock a strong play for value investors looking for solidly defensive assets in the consumer staples asset class.
