If you are a contrarian investor, and you like big dividend payments, then the fertilizer companies are worth considering. For example, the following table show the recent performance and dividend yield of several of the larger fertilizer companies, as well as the types of crop nutrients they produce.
The one-year total returns of all of the companies in this group are very negative. The companies have been hurt by low market prices on the fertilizers they sell. However, there is some reason to believe we are close to a bottom in the fertilizer markets. For example, in the recent Q2 conference call by Potash, the company said “Following a prolonged period of market uncertainty and weakening fundamentals, we believe potash markets have reached their low point.” Additionally, the long-term growth in global population will fuel a growing need for crops and fertilizers.
For your reference, we’ve provided a ranking (below) of six big-yield fertilizer companies that we believe are worth considers.
6. CF Industries (5.4% Yield)
Average selling prices of nitrogen fertilizers have been down significantly, and this has been the big driver of CF Industries negative return (it’s down 63% in the last year). Natural gas (and coal in China) are the main input in creating nitrogen fertilizers (used for corn), and the combination of cheap natural gas and increased China capacity have weighed heavily on the market. However, CF has a positive outlook for 2017. According to their Q2 earnings release:
“Q2 sales fell to $1.13B from $1.31B a year ago due to lower average selling prices across all segments, hurt by continued oversupply of nitrogen driven by global nitrogen capacity additions, but sales volume of more than 4.5M product tons achieved a quarterly record.” CF says “the demand outlook for the 2017 fertilizer season is positive, but abundant nitrogen supply will continue to pressure global pricing as new ammonia, urea and UAN production come on-line in H2 2016.”
We like CF Industries valuation as well as its big divided, however we’ve only ranked it #6 because the company recently suspended share repurchases in order to preserve cash, and there is some question as to the continued long-term sustainability of the big dividend payment if the nitrogen markets do not improve as expected.
Regardless, if you agree with CF Industries positive near-term outlook, and appreciate long-term global population growth, CF Industries is worth considering.
5. Mosaic Co. (4.0% Yield)
Mosaic is a producer and marketer of phosphate and potash crop nutrients. Despite a challenging price and demand environment, Mosaic’s phosphate business actually improved in the second quarter of 2016 versus the previous quarter due to the company’s cost cutting efforts. Additionally, the company has a positive outlook for potash explaining:
“With clarity on China and India potash needs, along with strong global demand and supply adjustments, we believe potash prices have bottomed and we see potential for modest price increases in the second half of the year.”
Additionally, Mosaic offers a big dividend (4.0%) and a compelling valuation. We would have ranked this company higher, but we believe one of its competitors in particular (Potash) has better potash mines. Additionally, Mosaic has a history of growing via acquisitions (they were formed through a 2004 merger and they more recently bought CF Industries phosphate business too). If industry consolidation continues, Mosaic could be on the buying end (because of its larger size) which can be expensive and less profitable than getting acquired.
4. Agrium Inc. (3.9% Yield)
Agrium offers a big dividend yield and an attractive valuation. The company operates in all three of the main fertilizer groups, but nitrogen is its most important. Additionally, Agrium’s business is supported by a stable cash flow from its retail operations (it’s the largest agricultural retailer in the US). We believe Agrium will continue to benefit over the long-term from the growing world population, and in the near-term it should benefit from moderately improving nitrogen markets. We would have ranked Agrium higher on our list except that we believe its main nitrogen business is a tougher fertilizer business to be in because of growing competition and low barriers to entry.
3. Potash Corp. (2.5% Yield)
Potash is an attractive contrarian investment. Its price and dividend payments have both declined sharply, and fertilizers markets remains challenged. However, the dividend yield (2.5%) is still attractive and the stock has very significant long-term upside potential. We have ranked Potash #3 on our list of top 6 Fertilizer Companies Worth Considering because of its low cost mines and because of the steady, growing, long-term, global industry demand. In our view, the continued challenges in the fertilizer industry make for an attractive entry point for diversified, long-term, income-focused, contrarian investors. You can read our full report on Potash here:
