Considering all the attention Potash Corp./Saskatchewan (TSX: POT)(NYSE: POT) gets, I was surprised when I recently looked at the stock’s performance over the past five years and saw it was only up 15%, excluding dividends.
The long-term thesis for investing in the company is simple: Over time, the population of the world is going to expand — by some 2 billion people by 2050, according to the United Nations — and we’ll need to produce enough food to feed them all. And since billions of people are expected to form a new global middle class in places like China, India, Brazil, and Turkey, we’ll collectively consume more calories as well. That seems like a good combination for food producers.
Then why has it been such a poor five-year period for Potash?
The company expanded significantly over the last decade, and is now plagued with all sorts of excess production capacity that goes unused. It also suffered in 2013 when OAO Uralkali announced it was leaving a worldwide potash cartel in order to push production higher. Uralkali increased production some 30%, and potash prices fell in sympathy. Currently, the price of the commodity is still below what it was before the breakup of the cartel.
Even though the short-term hasn’t been kind to Potash Corp., there’s still plenty of upside for investors who buy now and hold for a long time. Here are three reasons why.
1. Bullish farmers
2014 has been a good year for both Potash and competitor Agrium Inc. (TSX: AGU)(NYSE: AGU). So good that both companies reportedly sold out of fertilizer because of strong demand.
Farmers on both sides of the border are bullish. Canadian farmland prices continue to hit records, and many areas in the prairies are reporting crop yields that look terrific. Many farmers are flush with cash, partially because of great crops over the last few years and partially because of all the capital the sector has attracted. Farmers will put some of that money to work buying crop nutrients, which should lead to increased potash prices.
2. Increased production
Former CEO Bill Doyle spent billions — $8.3 billion, to be precise — to expand production capabilities, yet demand for potash was virtually flat from 2007-2013. Doyle recently left the chief executive office, replaced by Jochen Tilk.
Yet Tilk may end up being the main beneficiary of Doyle’s ambitious expansion plans. As demand increases for fertilizer, Potash Corp. is sitting on a massive amount of unused capacity. The company is in the position that it doesn’t have to worry about expanding for years. It can just focus on getting the most out of its operations, which is where analysts think Tilk will really show his worth.
3. Taking care of shareholders
Not only has Potash Corp. been setting itself up for long-term success, but it’s also been taking care of shareholders.
Since the end of 2010, the company has bought back more than 80 million shares, bringing the float down from 911 million shares to just under 830 million today. It bought back more than 25 million shares in 2014 alone, spending more than $1 billion to do so.
The company is also taking care of shareholders with a generous dividend, which currently yields more than 4%. Its dividend has increased seven times since 2011, yet its payout ratio has remained under 80% of earnings. Look for the dividend to creep up as production increases.
Investors in Potash Corp. are getting a company with a long-term trend behind it and the potential to easily increase supply to take advantage of it. Management has a history of taking care of shareholders, and shares have underperformed over the last few years. It’s a great entry point for patient investors.
