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Is Nutrien (TSX:NTR) a Top Commodity Stock to Buy in May 2021?

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Nutrien (TSX:NTR)(NYSE:NTR) looks undervalued today and should be a top stock for investors to buy this month.

Strong start to 2021

Nutrien reported great results for Q1 2021. The fertilizer giant said Q1 free cash flow hit US$476 million in the quarter, up more than 100% from the first quarter last year.

Adjusted EBITDA jumped almost 60%, supported by strong demand in the wholesale business and a record US$109 million from the retail operations. Retail sales increased 12%.

Nutrien’s wholesale group sells potash, nitrogen, and phosphate on large contracts to countries such as China and India, and it also supplies the spot market. The retail division sells seed and crop protection products to farmers around the globe.

Potash adjusted EBITDA rose 33% compared to Q1 2020, driven by higher prices and larger sales volumes. Nutrien expects global potash deliveries to meet or exceed record levels in 2021. Nitrogen EBITDA jumped 27% on the back of higher prices.

As a result of the strong start to the year Nutrien raised its full-year adjusted net earnings guidance to US$2.55-US$3.25 per share from US$2.05-US$2.75. Adjusted EBITDA is now expected to be US$4.4-US$4.9 billion, up from US$4.0-US$4.45 billion.

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Outlook for Nutrien during the rest of the year

The surge in crop prices that occurred in 2020 has continued into 2021. Corn just hit its highest price since 2013. High margins for farmers means they have more money to spend on seed and fertilizer for existing and expanded planted land.

Nutrien is forecasting a 3% increase in crop input expenditures in its key markets as farmers plant more acres this year, particularly in the United States and Brazil.

The positive market forces are having an impact on prices. India recent settled potash contracts for US$280 per tonne, up US$33 per tonne from the last agreement. That could push other countries to speed up purchases if they think price will continue to rise through the year.

Any announcement of a price increase on China’s next big contract could send the market even higher. That would be good news for Nutrien and its investors.

Dividends and share buybacks

Nutrien raised its quarterly dividend earlier this year to US$0.46 per share. The board also announced plans to buy back up to 5% for the outstanding stock over a one-year period.

The current distribution provides an annualized yield of 3.25%. The strong start to the year could lead to another dividend increase in the coming months.

Should you buy Nutrien stock now?

Nutrien trades near $71 per share at the time of writing. The stock should continue to trend higher on the strong market conditions for crop prices and record potash demand.

As fertilizer prices rise, Nutrien should see margins and free cash flow expand significantly. Commodities tend to go through cycles, and the fertilizer market might be in the early innings of a major expansion after a multi-year slump.

Some volatility should be expected, as weather conditions become more erratic and unpredictable, but Nutrien appears cheap right now with the strong tailwinds currently behind the sector. The market might not fully appreciate how much free cash flow the business can generate on higher prices.

If you have some cash to put to work in May, this top Canadian stock deserves to be on your radar.

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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.

The Motley Fool recommends Nutrien Ltd. Fool contributor Andrew Walker owns shares of Nutrien.

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