Potash Corp./Saskatchewan Inc. (TSX:POT)(NYSE:POT) just blew through its 12-month high and looks like it is setting up for a big run. Here are three reasons why I think the company could continue to go higher through 2015 and beyond.
1. Global supply issues
Uralkali, the world’s largest potash producer, has shut down one of its mines due to inflows of salty water caused by an enormous sinkhole. The size of the sinkhole has nearly doubled since it was first discovered and there are concerns that the entire facility could be at risk. Uralkali was getting roughly 20% of its potash from the affected mine.
2. Growing demand
Global demand for potash continued to build through 2014 and the trend should continue this year as Asian countries scramble to add stockpiles before prices increase.
Early last year, Uralkali set the market benchmark when it agreed to sell potash to China for $305 per tonne. In September, Oleg Petrov, Uralkali’s head of sales, told analysts that he expected the 2015 contract to be 10% higher. Spot prices rose through the end of last year.
If the new deal with China is announced at the 10% increase or better, shares of Potash Corp should get a big boost. The China deal, expected before the end of the month, will set the stage for similar deals with India and other big wholesale buyers. Last year, India paid $322 per tonne.
3. Dividend growth
Potash Corp. is completing a multi-year expansion at its facilities. The move from development to production has a big impact on free cash flow. Lower capital expenditures combined with higher production should result in a distribution windfall for shareholders in the next couple of years.
The company has increased the dividend significantly in the last three years and shareholders should see a healthy hike in 2015.
Potash currently pays a dividend of US$1.40 per share that yields about 3.7%.
4. Sector rotation
Dividend investors are exiting the oil sector in waves. As the money looks for a new home, some will be reinvested in Potash as a way to earn decent yield and ideally protect the initial investment.
Where else are Canadian investors going to go? Miners are still struggling, energy companies are taking it on the chin, and the banks are warning that 2015 is going to be tough. Aside from the telecoms, the odd pipeline company, and a few select REITs, there really aren’t many good options.
Should You Buy?
Potash Corp. has some momentum behind it right now. The fundamentals look good for the company, and the strong move through the 12-month high is a positive technical indicator. As a long-term investment, investors should do well.
Reliable dividend-growth stocks are tough to find these days. The following free report analyzes one more top income pick.
