Dividends have historically been an important component of the total return of the broader market and of individual stocks. These corporate payments are, essentially, a way of paying out cash flows to the owners of a company, in other words its shareholders. The way in which a company handles dividends can say a great deal about management and the company itself. A dividend distribution that is increased over time suggests a company that is growing and a management team that cares about returning money to its shareholders.
Not only does a growing dividend distribution say something about the company and its leaders, it also allows shareholders who are using the income stream for current expenditures to maintain their purchasing power. Inflation is an insidious destroyer of value, as rising prices can, over time, significantly diminish purchasing power. As an example, simply look at the trajectory of stamp prices. Two cents used to get a letter delivered, but now it costs many multiples of that amount. So, a growing dividend is an important consideration for more than just the corporate strength and care that it suggests.
There is sound logic, then, to seeking out companies that are expected to have material growth in their dividend distributions. To help investors quickly find such companies, we have screened our database of Value Line 600 companies for those with the highest estimated dividend growth rates over the next three to five years. We only considered those equities in the 90th percentile and above and chose to focus on Agrium Inc. (AGU).
Agrium is a leading producer and distributor of crop inputs such as fertilizers, seeds, and crop protection chemicals. Its retail business works with growers to implement best management practices based on a thorough understanding of local soils, climate conditions, and crop requirements. It serves customers across North America, South America, and Australia and is the largest agricultural retailer in the United States. Agrium’s Wholesale business unit caters to growers of grains, oilseeds, and other crops that are looking to optimize yields and quality. The unit delivered a record performance in 2011 reporting operating profits of $2.0 billion, or 72% of the total. In general, Agrium has a long history of making small, bolt-on acquisitions and quickly and effectively integrating them into its larger businesses.
In the second quarter, AGU delivered net earnings of $5.44 per diluted share, marking the strongest June period in company history. Both the Retail and Wholesale units benefited from excellent cost/operational execution and favorable demand conditions. Starting in late May, grain and oilseed prices rose dramatically following several weather-related problems that reduced crop production expectations in key growing regions. Specifically, severe drought conditions in the U.S. Corn Belt caused corn condition ratings to be the lowest since 1988. Elsewhere, Russian and Ukraine production and export forecasts have been reduced significantly, and Indian monsoon rains have been below average levels so far in 2012. With many crop prices expected to stay elevated through the spring of 2013, growers will likely be looking to get the highest possible yields from their existing land as well as expand acreage, which augurs well for sales of Agrium’s efficiency enhancing products. Further, most growers in the U.S. entered the 2012 season with historically strong balance sheets and are also covered by crop insurance, which should ensure significant cash flow for purchases of crop inputs in 2012 and 2013.
The company also appears committed to returning capital to its shareholders. In the second quarter, it announced a $0.50 semiannual dividend, more than double the prior payout and nine-times the December 2011 level. We believe this supports Value Line analyst Michael Napoli’s 30% annual dividend growth estimate. Further, the company announced a share repurchase program of $900 million.
Elsewhere, hedge fund Jana Partners revealed in early May that it owned just under 5% of Agrium shares, and that it is requesting that the Retail business be spun off. The company took this development seriously and solicited the council of Morgan Stanley (MS) on whether that particular strategy would be prudent. On August 14, Agrium announced that it would continue its integrated strategy and that the Board unanimously determined that a spinoff of the Retail operation would not be in the best interests of its shareholders. We believe this was the correct move as the retail operation is likely worth more inside Agrium than as a separate company. Investors appear to be of similar mind, and we doubt Jana will have much success convincing them otherwise at this juncture.
Although the strong results and favorable demand conditions have driven the shares up 45% year to date, we believe there may be further room for growth and suggest momentum investors take a closer look here.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.