Agrium Inc. is hoping another big dividend boost will keep investors loyal despite its warning that sales of its three key fertilizer ingredients will fall by up to 30 per cent in the third quarter.
The Calgary-based producer of nitrogen, phosphate and potash hiked its dividend on Monday by 50 per cent to an annual rate of $3 (U.S.) per share, only a year after doubling the payout.
Investors weren't immediately convinced, sending the company's shares down 3 per cent in reaction to its lowered outlook for the quarter ahead.
However, some money managers believe the company's current problems will be short-lived and point to the rising dividend as proof.
"The dividend increase sends a clear message that pricing pressures notwithstanding, their cash flow is sufficiently strong to support it," said Peter Brieger, managing director at GlobeInvest Capital Management Inc., which owns the stock.
"The long-term story, based on the nutritional needs for growing populations in developing nations, is still very much intact."
Agrium said delays in customer demand will drag down wholesale potash and phosphate volumes by 30 per cent in the third quarter compared with a year earlier. It also foresees a 20-per-cent slide in nitrogen sales.
"Benchmark nutrient prices in the third quarter of 2013 are 20 to 30 per cent below the same period last year," the company said on Monday.
Nitrogen prices are falling as a result of oversupply, particularly in China, one of the world's largest consumers of the crop nutrient. Meanwhile, India's falling currency is reducing its imports of both phosphate and potash.
An even bigger drag on potash prices and sales is the potential breakup of the world's largest potash marketing organization, Belarusian Potash Co. While there's speculation the group could be put back together, sales have turned sluggish as buyers anticipate deeper discounts ahead.
Lower prices for certain fertilizer-intensive crops, such as corn and soybeans, are also causing some farmers to reduce their yields and their demand for crop nutrients.
"There is a general cautiousness" and a "wait and see" approach in the markets right now, BMO Nesbitt Burns analyst Joel Jackson says.
Agrium chief executive Mike Wilson says price pressures are normal for the third quarter, but have been exacerbated by the fight in Belarus and India's weakened currency.
"When you compound those two things it causes you to have a short-term situation," Mr. Wilson said.
He insists the longer-term outlook for the business is solid, based on rising demand for food from a growing global population, which is why the company chose to raise the dividend.
Agrium is now paying a quarterly dividend of 75 cents per share, up from 50 cents. Both are up from the 22.5-cent semi-annual dividend the company paid in January, 2012. For a decade prior to that, Agrium paid a 5.5-cent dividend twice a year.
"We've been raising [dividends] pretty consistently as the fundamentals of the business keep getting stronger," said Mr. Wilson, who called the timing of the latest increase, alongside the warning, "coincidental."
The company began sweetening its dividend last fall as it confronted a boardroom challenge from dissident shareholder, Jana Partners LLC, which Agrium eventually won.
The higher dividend represents about a 3 per cent yield, which is still below the 4 per cent offered by Potash Corp. of Saskatchewan Inc., but above the 2 per cent at Mosaic Co.
Agrium's warning follows one made by Mosaic last week, when it said it expected potash sales volumes to fall by about 21 per cent and phosphate volumes by 15 per cent.
Scotia Capital Inc. analyst Ben Isaacson said Monday he expects Potash Corp. will warn next, but believes the potash sector will recover.
"Some investors question whether potash is an un-investable sector, given how share prices have been driven more by Russian/Belarusian politics, than by fundamentals. While it's a fair point, we expect the space to return to fundamentals imminently," he said in a note.