The Canadian equity market has been on a wild ride this year. A strong run through the first eight months of 2014 sent the TSX Composite Index up 15%. The recent pullback has nearly wiped out the gains for the year, and investors are wondering if a Santa Claus rally will save the day.
Potash Corp./Saskatchewan Inc. (TSX: POT)(NYSE: POT) has been one of the few solid standouts. The stock is up nearly 16% year-to-date, and 2015 could be even better.
Here’s why.
Demand strength
In its Q3 2014 earnings statement, Potash indicated it expects fourth-quarter shipments to come in at the high end of guidance. This shouldn’t be a surprise to investors.
Russian producer Uralkali said North American demand should finish the year about 8% higher than originally expected, and global demand is expected to finish 2014 at record levels, led by strong demand in Latin America, the U.S., and Asia.
China and India have been taking larger shipments to get the most out of their attractive 2014 supply contracts. At the same time, other Asian nations have increased demand and have been paying higher spot prices for potash orders in the second half of the year.
In September, Uralkali’s head of Sales, Oleg Petrov, said the strong demand recovery in 2014 would likely lead to higher wholesale prices for the 2015 contract with China. In January, Uralkali signed a deal to provide China with potash at $305 per tonne. India inked a deal with both Uralkali and Canpotex for $322 per tonne in April. Canpotex is the marketing company owned by Potash Corp., Agrium Inc., and The Mosaic Company.
If Uralkali manages to get a 10% increase in January, that deal will set the benchmark for the rest of the year.
Supply reduction
Just as demand is rising, a huge production cut is hitting the market. Uralkali, the world’s largest potash producer, has shut down one of its mines due to inflows of brine. At issue is a massive sinkhole that has nearly doubled in size since it was initially discovered. The increasing water inflows could result in the entire mine being flooded. The affected mine represents 20% of Uralkali’s production.
Dividend growth
Potash Corp. is at the end of a multi-year expansion program. The shift from development to production is coming just as demand is increasing and its largest competitor is struggling.
The production increase combined with a reduction in capital expenditures should result in a huge boost to free cash flow. Potash has already increased the dividend significantly in the past three years and shareholders could see another healthy hike to the distribution in 2015.
Potash pays a dividend of US$1.40 that yields about 4%.
Threats in 2015
One situation investors should keep an eye on is the recent announcement that China Investment Corp. has taken a 12.5% ownership stake in Uralkali. Analysts say the position is too small for the Chinese to influence global prices.
Another hard winter on the Canadian prairies could disrupt potash shipments as they did last year. This would have a short-term effect on earnings.
Should you buy?
The Canadian market isn’t offering up a lot of low-volatility opportunities right now for dividend-growth investors, but Potash is certainly one of them.
The following free report discusses a few other top picks you might want to add to the watch list for 2015. The three companies profiled in the analysis have delivered dividends to shareholders for decades.
