I initiated a new position in Agrium Inc (NYSE:AGU). Agrium is a $13B company specializing in fertilizers and has a wide variety of products including the three main necessities in crop growth and health - Nitrogen, Phosphate and Potash (termed popularly - NPK). Agrium's main market is industrial and commercial agriculture. The potash sub-sector has been in hot water lately due to collusion in the industry and price-fixing allegations, and as a result, the current fertilizer prices are subdued.
I initiated with a position in Agrium with 20 shares, and with a yield of 3.22% it adds approximately $64 to my annual dividend income.
Corporate Profile (from Yahoo Finance)
Agrium Inc. produces, retails, and distributes the crop nutrients, crop protection products, seeds, and agronomics primarily in North America, South America, Europe, and Australia. The company operates through two segments, Retail and Wholesale. The Retail segment supplies crop protection products, such as herbicide, fungicide, insecticide, and adjuvant products; crop nutrients, including dry and liquid nitrogen, phosphate, potash, sulfur, and micronutrients; seeds; and merchandise comprising fencing, feed supplements, livestock-related animal health products, irrigation equipment, and other products. It also provides product application, soil and leaf testing, crop scouting, seed treatment, cattle, livestock and wool marketing, insurance, and real estate, as well as offers plant nutrient and precision agriculture software packages. The Wholesale segment produces, markets, and distributes a range of nutrients, including nitrogen-based, potash, and phosphate-based crop nutrient products to agricultural and industrial customers. The company also offers crop-inputs technology and precision agriculture services under the Echelon brand name; and supplies specialty fertilizers. The company was formerly known as Cominco Fertilizers Ltd. and changed its name to Agrium Inc. in 1995. Agrium Inc. was founded in 1931 and is headquartered in Calgary, Canada.
Recent Buy Decision
The rationale behind investing in a fertilizer company is fairly simple and straight-forward. The continued rise and growth in demand for food puts agriculture as one of the top priorities over the next few decades.
- The world population is expected to grow massively in the next few decades. Current UN projections estimate the world population to reach 8.3 - 10.9 billion by 2050. See figure on the right for the projection visual. Feeding all those people will require farms to be more productive and efficient.
- Couple the growth in population with the advancement in healthcare, where people are living longer - the demand for food will continue to rise.
- Using arable land to grow crops year after year causes the nutrients to run thin. Considering that the arable land in the world is limited, the need for supplementing the soil with fertilizers and other nutrients is essential.
- I prefer AGU to its main competitors Potash Corp of Saskatchewan (NYSE:POT) and Mosaic Co (NYSE:MOS) as it is more diversified. While MOS only mines phosphate and potash-based fertilizers; POT is the largest producer of potash with a small portion of its business in nitrogen and phosphate-based fertilizers; AGU produces nitogen, potash, sulfur, and phosphate-based fertilizers.
- AGU pays a healthy 3.22% dividend with a payout ratio of 44.3%. The 5-yr DGR is 90.5% - although AGU will not be able to keep raising dividends at the same rate in the future.
- Good valuation with a P/E of 14.52 and Forward P/E of 10.97.
Agrium has been paying dividends since 1999. Until the end of 2012, dividends were paid semi-annually, but starting 2013, dividends are now paid quarterly. Agrium has been aggressively growing its dividends over the years. AGU has raised dividends 4 years in a row and has a 5-yr dividend growth rate (DGR) of 90.5% (that's not a typo!). The current payout ratio stands at 44.3%.
A special note about the dividend payment. Even though Agrium is a Canadian company, the dividends declared are in US dollars. Dividends paid to Canadian residents will be converted to Canadian dollars based on Bank of Canada's exchange rate at noon on the record date.
Even though, I am bullish on this investment over the long term, the investment comes with some risks. The recent problems in the fertilizer industry has dampened the prices and the whole industry has suffered. In addition, there are a number of new entrants who have started undercutting the prices set by large companies such as AGU, POT, MOS etc; and hence could see some pressure on sales/margins.
A summary of the stock
- Symbol: AGU
- Quote: $99.61
- 52-week range: $83.46 - $108.28
- P/E: 14.52
- Forward P/E: 10.97
- Debt/Equity: 0.53
- Yield: 3.22%
- 5-yr average yield: 1.30%
- 5-yr DGR: 90.5%
- Book value: 45.72
- Graham number: 84.00
- Chowder rule: 94
Do you own AGU? What are your thoughts on the sector and the industry? Make sure to leave a comment below.
Full Disclosure: Long AGU. My full list of holdings is available here.
Disclosure: The author is long AGU. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.