Agrium has been the beneficiary of a lower Canadian dollar and falling energy prices – including cheaper natural gas, which helps the firm save costs on the production of nitrogen.Getty Images/iStockphoto
Investors betting on expansion of the global fertilizer industry through diversified player Agrium Inc. are reaping big rewards as the company readies to pay out higher dividends. However, some caution the stock's recent growth spurt may be over, at least in the near term.
Shares of the Calgary-based farm retail dealer and producer of potash, nitrogen and phosphate are trading near all-time highs after it said last week it would pay out a larger percentage of its free cash flow as dividends and buy back up to 5 per cent of its shares.
The cost savings from a lower Canadian dollar and cheaper energy prices – in particular natural gas used to produce nitrogen – are also helping Agrium save money in the short term, alongside its own operating cost cuts. There's also the expectation of a strong spring growing season for farmers across North America, based on the company's report of strong prepayments for crop inputs so far this season.
Even before the dividend payout increase was announced Jan. 22, CIBC World Markets analyst Jacob Bout hiked his target to $125 (U.S.) from $118, naming Agrium his top pick for 2015.
"We expect agriculture and fertilizer stocks to outperform natural resource stocks in general in 2015, as agriculture fundamentals remain solid," Mr. Bout said in a note. "We also expect Agrium to outperform its peers as we believe it has the best growth and margin improvement story of the global fertilizer industry."
He's one of 14 analysts with a "buy" or equivalent rating on the stock, while 14 say "hold" and one says "sell," according to Thomson Reuters. The analyst consensus price target over the next year is about $108, which is slightly above its current price around $106 on the New York Stock Exchange.
Canaccord Genuity analyst Keith Carpenter has a $112 price target and a "buy" rating on Agrium, but a "hold" rating on competitors Potash Corp. of Saskatchewan Inc. and Mosaic Co.
"We prefer Agrium in 2015 due to solid volume growth, increasing nitrogen margins and free cash flow expansion," he said in a note.
Agrium chief executive Chuck Magro said the company is in the final year of a multiyear capital expansion program, which will increase its nutrient production capacity, specifically potash and nitrogen, by 20 per cent over the next two years.
"Even in modest market conditions, we see Agrium generating a lot of free cash flow," said Mr. Magro, which is why the company decided to boost its target dividend payout ratio to between 40 and 50 per cent of its free cash flow, up from 25-to-35 per cent.
"The plan is to see a sustainable, growing dividend," Mr. Magro said in an interview.
While that's good news for existing shareholders, some say the stock looks expensive today and may not grow much in the short term.
"I don't see a lot of catalyst to push the stock considerably higher going forward," said Stan Wong, director of wealth management and a portfolio manager with ScotiaMcLeod.
Mr. Wong, who doesn't own the stock, said the shares have had a good run – increasing about 20 per cent over the past year and more than 10 per cent so far in 2015.
Agrium shares hit a 52-week high of $107.68 on the New York Stock Exchange on Jan. 22, its highest level in two years, after the company's dividend payout increase announcement. On the same day, Agrium shares hit a record in Toronto of $133.24 (Canadian).
Miller Tabak + Co. analyst Tim Tiberio lowered his price target last week to $103 from $105 and downgraded it to "hold" from "buy."
"To be clear, we remain positive on Agrium's long-term growth story," Mr. Tiberio said in a note, but added that Agrium is "no longer looking cheap" on its 2015 earnings potential.