Analyst Ben Isaacson of Scotiabank Global Banking and Markets says Agrium Inc. (USA) (AGU) is a misunderstood story, because unlike most publicly traded fertilizer producers, 50% of Agrium’s EBITDA comes from its retail business.
“Retail is known for providing investors with stable and more predictable free cash flow. Over time, as they continue to build up their retail business and dilute their wholesale commodity business, we expect that the stock will get a re-rating as investors reward Agrium with a higher multiple for that more stable free cash flow,” Isaacson said.
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Isaacson believes Agrium’s free cash flow can grow from zero today to nearly $1 billion in 2015 and potentially up to $1.5 billion in 2016. The second part of the story, he says, is what Agrium does with that cash.
“We think cash generated should be returned to shareholders, in the form of dividend hikes and share buybacks, rather than continuing to empire build. In summary, we think Agrium can increase its dividend to $4 per share from $3 per share over the next 18 to 24 months,” Isaacson said.
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