Monsanto Company (MON), CF Industries Holdings, Inc. (CF): Some Bang For Your Buck

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Agriculture is one of the oldest industries in the world and is considered to be one of the most consistent and stable sectors, yielding steady returns over time. Last year’s drought in the U.S wreaked havoc on its crop yields, which led to the stellar financial performance of most agricultural companies. The weatherman is predicting that the dry spell isn’t over yet, which suggests that agriculture companies like Monsanto Company (NYSE:MON) could have another great year.

Growth prospects

Due to a shortage of supply, corn prices had skyrocketed to historic highs which is why corn plantations are still offering stellar ROIs. Naturally, farmers are more inclined toward maximizing their corn crop yields and are investing heavily in high-quality fertilizers and corn seeds. As a result, Monsanto Company (NYSE:MON)’s management is expecting to hit record corn volumes in FY 2013 and is targeting gross profits of $7.7-$7.8 billion in current year.

Management stated that its corn sales have increased by 19% YTD with strong global demand. As a result, the company’s quarterly sales and revenue rose by 15% and 11%, respectively.
Monsanto (MON)For the full year, Monsanto Company (NYSE:MON) is expected to generate $1.5 billion to $2 billion in free cash flow, which could be used entirely for repurchases and stock buybacks.

In a bid to get ahead of its peers, management recently announced plans to expand its Chesterfield Village Research Center for $400 million. The facility is primarily used for idea generation and research work, and it’s estimated to create 675 new jobs and to be complete by 2017.

Although the expansion project won’t have an immediate effect on its earnings, the added workforce is expected to support lowering costs and increasing productivity, which would be beneficial over the long run. But then again, these are result-oriented and intangible impacts, which are speculative in nature.

Bang for the buck

Monsanto Company (NYSE:MON) is known to return value to its shareholders. The company has returned around $3.3 billion to its shareholders over the last three years, and currently has a $1 billion share-buyback program underway. The company repurchased $300 million worth of its shares in the previous quarter alone, and going by the pace of its buybacks, I believe Monsanto could exhaust the capital in the next two quarters. This leaves a pending repurchase of around 6.6 million shares with a buyback yield of 1.2%

Its dividend yield of 1.4% might seem insignificant, but Monsanto Company (NYSE:MON) has hiked its dividend payouts by 476% since 2004. With a modest payout ratio of 30.3%, cash and cash equivalents of $4.4 billion along with free cash flow (ttm) of approximately $2.5 billion, its dividend payouts seem rock solid with ample room for increases in the future.

Additionally, its low debt/equity of 17% and annual interest expenses of just $35 million suggest that the company can use its cash (and cash flow) for whatever reasons it may deem fit.

Peer talk

Amongst the fertilizer companies, CF Industries Holdings, Inc. (NYSE:CF) and Agrium Inc. (USA) (NYSE:AGU) lead the pack, but their shares have entered oversold territory due to rising natural-gas prices. Manufacturing nitrogen-based fertilizers requires the use of natural gas as an ingredient. Naturally if the cost of raw materials is higher, profit margins would be lower, which puts the bottom lines of CF Industries Holdings, Inc. (NYSE:CF) and Agrium Inc. (USA) (NYSE:AGU) under pressure.

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