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Why Potash Corp./Saskatchewan Inc.’s 4% Dividend Could Keep Surging

Potash Corp./Saskatchewan Inc.’s (TSX: POT) (NYSE: POT) divided is up an incredible 950% since January 2011. Because of that the company’s stock currently yields a very generous 4%. However, there’s still a lot of dividend growth potential left. Here’s why.

Spending headed lower

Last year PotashCorp generated $3.2 billion in operating cash flow. However, instead of sending all of that money back to investors in the form of an even larger dividend, it reinvested just over $1.5 billion to grow its potash capacity. This spending was part of the company’s massive $8.3 billion decade-long potash expansion program.

That expansion program, however, is now 94% complete, and is expected to be finished by 2016. As the company draws closer to completing that plan, it’s seeing its capital spending rate fall off a cliff. At its peak, PotashCorp’s expansion program cost the company well over $2 billion per year from 2010 to 2012.

This year, however, it expects to only spend about a billion dollars and by 2016 the company’s capital spending will be down to sustaining levels of just over a half billion per year. That’s a significant amount of cash flow that could soon be used to support an even higher dividend.

Strong cash flow growing stronger

On top of the reduction in spending, the additional potash capacity the company is adding will grow future sales and operating cash flow. In fact, PotashCorp believes potash shipments will grow from about 50 million tonnes last year to nearly 70 million tonnes by 2018.

Given that it is building a third of the world’s new potash capacity, it expects to capture a large portion of these new sales. That sales grow over the next few years will only add more cash into the company’s coffers.

Fewer shares outstanding

Finally, in addition to boosting its dividend, PotashCorp has also been using some of its growing excess supply of cash flow to buy back its stock. In fact, the company recently completed buying back 5% of its outstanding shares, and since 1999 it has bought back a quarter of its outstanding shares.

By reducing its share count, the company is actually reducing its dividend obligation as the payout is spread across fewer outstanding shares. That actually gives the company even more cash that it could use to increase its payout to the remaining shareholders.

Lower capital spending, increasing cash flows from capacity expansion, and a lower share count mean PotashCorp has a lot of room for future dividend growth. This is why I’m convinced that PotashCorp’s dividend will be heading a lot higher over the next few years.

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Matt DiLallo has the following options: Short December 2014 $35 puts on PotashCorp. The Motley Fool owns shares of PotashCorp.

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