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Is Nutrien (TSE:NTR) Still a Value Play Despite Its Recovery?

Posted on December 29, 2020 by Dan Kent

Disclaimer: The writer of this article or employees of Stocktrades Ltd may have positions in securities listed below. Stocktrades Ltd may also be compensated via affiliate links in the post below.

Nutrien dividend

 

When looking for reliable Canadian dividend stocks, it’s hard to avoid blue-chip giants that are trading at low valuations.

A company like Nutrien (TSE:NTR) was one of those no brainer value plays. Hitting the mid $30 range during the peak of the March 2020 crash, Canadian investors were happy to scoop this company up at what now looks like a near 70% discount.

But, does the company still present a unique value opportunity to investors looking to buy Canadian stocks? In the current market conditions, value plays are becoming increasingly hard to find and when we do identify one, it’s best to pounce.

Lets take a look at how Nutrien is doing, and how I feel Nutrien stock is going to perform moving forward.

What exactly does Nutrien (TSE:NTR) do?

Nutrien is an agriculture based company that produces over 25 tonnes of potash, nitrogen, and phosphate to consumers across the globe. The company currently has a network of over 2,000 locations. Nutrien has operations in both North and South America, as well as Australia.

The company services over half a million accounts, and is in a solid position to capture further growth.

Nutrien comes from a 2018 merger of Potash Corp and Agrium. Prior to the acquisition, Potash was the world’s largest potash producer and Agrium was a major producer of agriculture and chemical products.

As a result, the merger of two biggest fertilizer companies in the world created a Canadian blue-chip giant in Nutrien today.

Lets have a look at Nutrien’s dividend

As a company in a mature industry, it’s likely we see low to mid single digit top and bottom line growth from Nutrien.

So, as a result investors often look to invest in Nutrien for its dividend and reliable cash flow.

TSE:NTR Nutrien Dividend Yield

Charts provided by StockRover. Check out Stockrover Here!

At the time of writing, the company currently yields a respectable 3.84%. If we look to the peak of the COVID-19 pandemic in March, this is a company you could have grabbed at a 6.50% yield, to go along with a severely depressed share price.

But, you’re getting a solid income stock right now nonetheless, one that is well covered by cash flow.

Although Nutrien’s payout ratio sits at 103% of trailing twelve month earnings, it’s important we look towards the free and operating cash flow payout ratios. These payout ratios come in at a comfortable 67% and 33% respectively. So, the dividend should be able to continue to be raised.

The company has a 3 year dividend growth streak, which seems fairly low but this can be attributed to the fact that Nutrien has only been trading since 2018 after the merger.

The company is prone to cyclical shifts, and as a result we’re likely to see the company be a little more conservative with its dividend. Although FCF payout ratios are around 67% of trailing twelve month cash flows, more than comfortable, a cyclical shift in the company’s earnings could send this payout ratio higher.

So now that we know Nutrien’s dividend is likely to be maintained, we’ll need to take a look at if the company is going to be able to sustain the dividend and dividend growth for the foreseeable future.

And, we can do that by looking at the company’s ability to grow its top and bottom lines.

How has Nutrien grown, and how will it grow moving forward?

There’s no doubt the merger between Potash and Agrium has been somewhat messy. As a result, Nutrien’s share price has been trading relatively sideways for quite some time.

TSE:NTR Vs the TSX 2 Year

Market Cap: $34.79 billion
Forward P/E: 27.70
Yield: 3.83%
Dividend Growth Streak: 3 years
Payout Ratio (Earnings): 103.02%
Payout Ratio (Free Cash Flows): Premium Members Only
Payout Ratio (Operating Cash Flows): Premium Members Only
1 Yr Div Growth Rate: 4.65%
5 Yr Div Growth Rate: Premium Members Only
Stocktrades Growth Score: Premium Members Only
Stocktrades Dividend Safety Score: Premium Members Only

 

In fact, if we look to the chart we can clearly see that Nutrien has lagged the broader index by a significant margin over the last couple years, posting dividend adjusted returns of 5.1% while the TSX Index has returned 23.8%.

I like to see consistent top and bottom line growth, and Nutrien as a result of the mega-merger in 2018 has struggled to do this.

In fact, over the last two fiscal years we’ve seen the company’s revenue remain relatively flat and earnings plummet, going from $3.5 billion in 2018 to just $992 million in fiscal 2019.

The merger as well as an oversupply of product in the sector are likely a cause of this, and as a result this stock has underperformed. However, I believe the market is being a little hard on Nutrien right now, and I do see upside in their current price.

Global demand for food is increasing, and will continue to increase

If there is one thing we could bet on to be an absolute certainty, it’s the fact that global demand for food and agriculture products will continue to increase as the global population grows.

These increases aren’t over the short to medium term either. We can likely predict that demand will continue to increase for multiple decades, which bodes well for a company with a 20%+ market share in the fertilizer and agriculture chemical supply industry.

In fact, some experts are pegging the worlds global population to exceed 10 billion people in the next 30 years. That would mark a near 30% increase from todays levels, and people need to eat.

The growth in demand for Nutrien’s products won’t be exceptional, most agree that a mid to high single digit increase is what we can expect, but this is more than enough for a company operating in a mature industry with significant cash flow.

The company has had another rough year in 2020, posting top line growth of only 1% through the first 9 months, EBITDA and free cash flows falling 14% and 19% respectively. However, I’m cautiously optimistic the company will rebound in the future and should be a solid option for Canadian investors looking for reliable income and an investment that provides relatively low volatility.

Dan Kent

About the author

An active dividend and growth investor, Dan has been involved with the website since its inception. He is primarily a researcher and writer here at Stocktrades.ca, and his pieces have numerous mentions on the Globe and Mail, Forbes, Winnipeg Free Press, and other high authority financial websites. He has become an authority figure in the Canadian finance niche, primarily due to his attention to detail and overall dedication to achieving the highest returns on his investments. Investing on his own since he was 19 years old, Dan has compiled the experience and knowledge needed to be successful in the world of self-directed investing, and is always happy to bring that knowledge to Stocktrades.ca readers and any other publications that give him the opportunity to write. He has completed the Canadian Securities Course, manages his TFSA, RRSPs and a LIRA at Questrade, and has compiled a real estate portfolio of his primary residence and 2 rental properties, all before his 30th birthday.