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.
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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 Victoria Hetherington has no position in any of the stocks mentioned. Nutrien is a recommendation of Stock Advisor Canada.