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A high-dividend company: Where’s Agrium’s cash going?

Jose de la Puente

An investor's guide to Agrium, a high-dividend company (Part 7 of 7)

(Continued from Part 6)

While lower than its peer group, Agrium’s capex still matters

Other than repaying payables and long-term loans, Agrium has two main cash expenses that you should be aware of:

  1. Dividends paid
  2. Capital expenditure

While large capital expenditure is common in this industry, Agrium has achieve dividend yields that not many companies offer.

Competitive advantage

The fertilizer industry offers an inherent competitive advantage. This is its high barriers to entry due to high capital requirements. This means companies in this industry need large amounts of capital to start operating. Consider the $1.8 billion potash expansion that Agrium is undertaking as an example.

But as we can see from the graph above, Agrium has the smallest capex-to-revenue ratio among its peers. On average, Agrium’s peers spend 18.3% of their revenue expanding and sustaining assets. But this number is skewed by Intrepid Potash (IPI), a small potash producer that has been experiencing large expansions in recent years. PotashCorp (POT), one of Agrium’s closest peers, also has one of the highest capex-to-revenue ratios.

While CF Industries (CF) has a similar ratio to Agrium’s (AGU), you should note that retail—Agrium’s largest business segment—demands much less capital for expansions. While around 38% of Agrium’s capex is sustaining capex, the remaining 62% is acquisitions and wholesale expansions.

How Agrium became a dividend company

Many investors are attracted to high-dividend-yield companies due to the security of steady income. In 2013, Agrium returned a 2.73% dividend yield. This means that for every dollar invested in Agrium, investors made almost 3 cents. Some companies don’t offer dividends at all.

But Agrium hasn’t always been a high-dividend-yield company.

Before 2012, Agrium yielded below 0.5% in dividends. With the recent accumulation of cash, the company has been able to return more to its investors. This is an oversupplied industry. So you can argue that other cash expenses, such as capex, will be smaller in the future. This raises the chances of further dividend returns. For this reason, analysts believe Agrium’s high yields won’t only stay high, but might also increase in the next couple years.

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