Can Agrium Increase Your Portfolio's Yield?

Mihir is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

As the earnings season draws to a close, Agrium Inc. (NYSE: AGU) has given its investors a reason to smile. The company reported robust quarterly results earlier last week, beating analyst estimates, which were extremely bullish on its performance. The reason behind these bullish estimates was Agrium’s guidance for the fourth quarter of 2012, wherein it raised its EPS estimates to the range of $1.50 - $1.90 per share based on excellent performance in its retail business.

The net earnings for the quarter reached an all-time high at $354 million, or $2.34 per share, which compares to net earnings of $193 million, or $1.20 per share, in Q4, 2011. However, the net earnings figure contains a couple of recoveries related to claims and share-based payments, and excluding these would bring the earnings to $2.16 per share.

The management of Agrium has attributed these excellent results to strong performance achieved by its Retail and AAT business segments. In the Retail segment, sales increased by nearly 8% on the back of increasing demand for food and steadily growing crop prices. The crop nutrient sales increased by almost 10% owing to large planting of winter wheat acres and an extended fall application season. Advanced Technologies also delivered impressive results based on stronger sales volumes and better margins for ESN (Environmentally Smart Nitrogen).

Industry Peers

The fertilizer market is expected to grow in 2013 as more and more crop producers are relying on such fertilizers for better yield because the land under agriculture is gradually reducing. One of the major players in potash production, Potash Corp. of Saskatchewan (NYSE: POT), has been on the radar of analysts as a moderately high growth stock. In the recently announced results for Q4, 2012, EPS came in at $0.48 per share and guidance for the first quarter of 2013 was given in the range of $0.50 - $0.65 per share. As the management stated in its call, the slowdown in demand for potash has resulted in excessive supply, which has adversely affected the price per ton. The agreement with Sinofert Holdings in China for the supply of potash well below the agreed contract price evidences a slowdown in product demand.

For the most recent quarter, The Mosaic Company (NYSE: MOS), another big player in the fertilizer business, reported net income of $1.47 per share, which was an increase of 5% on a year-over-year basis. The company made quite a smart move recently by settling potash antitrust litigation that had been pending in the U.S District Court since 2008. The litigation would have entailed substantial costs and time burden, and this timely settlement will work out very well for the company.

About the Agrium Stock

The recent quarterly results by Agrium are definitely impressive, and more than everything else have enforced positive expectations from the agricultural products business. The company took appropriate advantage of higher crop prices in Northern America, which boosted the performance of its retail segment. This interesting article makes a significant point about the presence of nitrogen-fertilizer business in Agrium’s portfolio apart from potash production, which provides a viable hedging option. The U.S demand for nitrogen is expected to be pretty strong as a result of high crop acreage, which puts Agrium in a strategic position to meet demand.

In its earnings call, management stated that its dividend payment had reached $2 on an annualized basis, which in fact demonstrates its commitment to growing total shareholder returns. Growth in dividend payout is correlated to growth in overall business, making it possible for the investors to gauge and forecast performance in the oncoming quarters. Another point for consideration is maintenance of gross profit at 2011 levels on the back of a vigilant cost management structure and higher sale volumes.

The Bottom Line

There are certain favorable points I have mentioned below that reinforce my confidence in Agrium’s performance:

  • Favourable conditions for market growth and Agrium’s strategic position to gain from viable opportunities.
  • Low risk business model owing to the presence of nitrogen-fertilizers.
  • Solid dividend history
  • Integrated product strategy

In light of these points, I would suggest Agrium be included in your portfolio.


MihirMehta has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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