The share price of Nutrien (TSX: NTR)(NYSE: NTR) is up 40% from the March 23rd closing low. Value investors who missed the market rally want to know if more upside is on the way.
Fertilizer outlook
Stories abound of farmers facing dire situations for the 2020 planting season. Travel restrictions and lockdowns mean growers can’t get enough seasonal workers. Farming is a community business in many areas. Observing social-distancing measures is going to be difficult.
Farmers can’t delay their planting until lockdowns are lifted. The window of opportunity to get crops in the ground is tight. Weather is always an issue, and when a good day arrives, planters have to move quickly.
The pandemic comes on the heels of a bad 2019 for Nutrien and its peers. Record rainfall in the United States last spring hurt demand in that market. A late monsoon resulted in lower purchases in India. Weak palm oil prices in Indonesia contributed to the pain as well. China’s suspension of imports later in 2020 also hit potash sales.
Opportunity
Nutrien is the planet’s largest potash producer and a major supplier of nitrogen and phosphate. These products are essential crop nutrients used by growers around the world to boost yields. The company continues to operate during the pandemic, as its operations are deemed essential by global governments.
In a March 30th update, Nutrien said it still anticipates solid demand for crop inputs this spring. Global buyers drew down stockpiles last year, so a rebound in potash sales could materialize through the end of 2020 and into 2021.
Food demand will continue to rise over the next 30 years, as the global population expands from roughly 7.8 billion today to an estimated 10 billion in 2050. Urban sprawl to build housing eats up farmland. The result is higher yield requirements from less arable land.
This trend should mean strong long-term demand growth for Nutrien’s wholesale group as well as its large retail division, which supplies farmers with seed and crop protection products.
Should you buy Nutrien stock?
The merger between Potash Corp. and Agrium formed Nutrien in early 2018. The two companies completed multi-year capital programs before joining forces. This means Nutrien has the world-class facilities in place to meet rising demand in the coming years. As a result, investors shouldn’t have to worry about dilutive share sales or large debt expansion to fund major capital projects.
Nutrien continues to expand its digital solutions business. The group helps farmers manage all aspects of their businesses and provides an added revenue stream. The retail operations balance out some of the volatility in the wholesale division. Agrium continues to grow the global retail business through acquisitions.
In fact, the company recently announced a deal to buy a major player in Brazil.
Nutrien returns cash to shareholders through share repurchases and dividends. In February 2020, the company announced a plan to buy back up to 5% of its outstanding shares through the start of 2021. This could be put on hold if the pandemic impacts sales more than expected.
The dividend, however, should be safe. Nutrien’s current quarterly payout of US$0.45 per share provides a yield of 5%.
Ongoing volatility should be expected, but buy-and-hold investors might want to start adding Nutrien to their portfolios. At the time of writing, the stock trades at $50. Nutrien was above $72 a year ago, so the upside potential remains attractive, and you get paid well to wait.
