Written by Brian Paradza, CFA at The Motley Fool Canada
The crop nutrients market is normalizing to mid-cycle levels in 2023. Market traders may never see the record fertilizer prices of the past year again soon. However, Nutrien (TSX:NTR) stock is an all-weather, cash-flow-rich, dividend-growth stock that will continue to nourish income and capital growth needs in investors’ long-term retirement plan portfolios.
Nutrien stock is caught up in a negative momentum spiral this year. Shares trade 42% below their all-time highs reached in 2022.
Revenue is declining off last year’s peak, operating earnings margins are shrinking, and Nutrien’s cash-flow-generating power has waned in 2023. However, a look at the bigger picture could identify Nutrien stock as a good buy after first-quarter (Q1) 2023 earnings.
Nutrien’s mixed bag Q1 earnings
Nutrien’s Q1 revenue dropped by 20% year over year to US$6.1 billion, reflecting a normalized agricultural crop inputs market. Crop nutrient prices have normalized back to midcycle levels, as the fertilizer market cools off a year after the onset of a disruptive Russia/Ukraine conflict. However, quarterly net earnings of US$576 million were the second highest of any Q1 profits on record.
Gross and operating margins shrank, as realized prices decline to normalized levels, and the company is working through its high-cost inventory build. As usual, free cash flow was negative for the quarter; however, the total debt issued (nearly US$3.4 billion) was highest during the last five quarters. Nutrien’s leverage is growing.
Should you buy the dip in Nutrien stock?
An investment in Nutrien stock today could reward you with a quarterly dividend that yields 3.4% annually. It will offer investors a growing stake in a well-established and profitable agricultural inputs business that generates billions in free cash flow every year. Capital gains will turn positive once ongoing revenue declines stabilize in a normalized market.
Nutrien stock price has fallen below January 2022 levels after months of negative price momentum. The January 2022 period is a key reference point. It lies before the brake out of the Russia/Ukraine conflict that triggered turmoil in the global fertilizers market, triggering a rally in North American fertilizer producers’ stock prices. Shares trade cheaper as the negativity of declining sales drags stock values lower. However, the decline could be overdone.
After a massive share-repurchase program, the company has 11% fewer shares outstanding today compared to January 2022. Management splashed more than $6 billion in cumulative share repurchases over the past five quarters, as the company made record profits and booked record cash flow last year.
The company is still repurchasing shares, and the remaining shareholders have a growing stake in its future earnings and cash flow.
Shares look cheap at a forward price-to-earnings (P/E) multiple of nine that lies far below NTR’s peak forward P/E of 25 an average of 14.4 since the merger of Agrium and Potash Corp in 2018.
Nutrien is a long-term, buy-and-hold Canadian materials stock that should do well in the future as crop production levels remain high and farming yields remain elevated in North America, and as it grows its global market share with acquisitions in Brazil.
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Fool contributor Brian Paradza has no positions in any of the stocks mentioned. The Motley Fool recommends Nutrien. The Motley Fool has a disclosure policy.