1 Stock With Dividend Growth Potential

Upheaval in the potash market has sent conservative investors fleeing from fertilizer companies, but there is one exception with little potash exposure that offers growth, dividends, and stability.

Jan 27, 2014 at 10:18AM

Human life depends on agriculture, and there is no reason why it shouldn't be an important part of your portfolio. A good, conservative dividend needs to be supported by diversified and steady income. Many companies in the agricultural industry are dependent on a limited number of volatile markets, but Agrium (NYSE:AGU) bucks the trend. Its dividend yield is lower than PotashCorp's (NYSE:POT), but Agrium offers steady income growth with its retail operations and wholesale nitrogen business. 

The potash market

Potassium Chloride (Muriate of Potash) Spot Price Chart

Potassium Chloride (Muriate of Potash) Spot Price data by YCharts

It is clear from the above chart that Agrium's gross profit is not too dependent on volatile potash prices. As seen in PotashCorp's and Mosaic's (NYSE:MOS) rapidly falling gross profits, not all fertilizer companies are the same. By looking at potash as a percentage of gross profit or gross margin, it is even clearer which companies are exposed to potash volatility. In 2012 potash made up just 18% of Agrium's wholesale gross profit while it made up 57% of PotashCorp's gross margin and 53% of Mosaic's gross margin. 

2014 is shaping up to be a tough year for PotashCorp and Mosaic. The recent shakeup in potash's market governance pushed the 2014 price floor down around $300 per tonne, a substantial decline from the $400-plus per tonne that was seen in 2013.

PotashCorp and Mosaic are trying to deal with potash's instability
PotashCorp has decided that cutting costs is the best way to deal with the new potash market. It recently decided to remove 1,045 positions and shut down a number of facilities. Mosaic is looking for growth in other areas. Its acquisition of CF Industries' phosphate business for $1.4 billion is currently making its way through the U.S. legal system.

Even with these mitigation techniques, PotashCorp and Mosaic are facing little or no growth in 2014. They rely on potash for a significant portion of their gross margin, and the recent cartel shakeup is having a lasting impact. With PotashCorp expected to post earnings per share of $2.12 in 2013 and $2.04 in 2014, it would be very difficult to justify any significant dividend increase. Mosaic is a in a similar situation, with expected EPS of $2.95 in 2013 and $2.96 in 2014. For conservative investors it is probably best to take a wait-and-see approach with these companies.

Look at dividend growth potential
Dividend growth is a powerful tool, as it increases the effective yield on your original investment. Agrium offers an attractive dividend because of its growing operations. Between 2005 and 2012 it grew its retail operations from 16% to 32% of its annual earnings before interest, taxes, depreciation, and amortization. To help reach the goal of growing its retail EBITDA from $951 million in 2012 to $1.3 billion in 2015, it recently acquired 210 farm centers from Viterra.

On the wholesale side, it also expects to see growth thanks to expanding demand in the nitrogen, phosphorous, and potash markets. Agrium's nitrogen operations provided 64% of its 2012 wholesale gross profit, and there is a relativity low chance that the nitrogen market will see a sudden price fall.

The nitrogen market is not as concentrated as the phosphorous or potash markets, leaving little chance of a sudden major change in market governance. Thanks to continued improvements in multipad drilling and pressure to decrease flaring, North America's natural gas supply growth should help keep nitrogen costs from increasing too rapidly.

Final thoughts
The agriculture market provides a great opportunity for you to invest in the companies that help put food on your table. While instability in the potash market has taken a big hit on PotashCorp and Mosaic, Agrium is more dependent on its nitrogen operations and growing retail business. Its 3.2% yield is not massive, but if you are willing to take a five-year position, then future growth should push its dividend up even higher.

See our top stock pick for 2014
There's a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

Joshua Bondy has no position in any stocks mentioned. The Motley Fool owns shares of PotashCorp. 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information