On January 28, a day marked by gloomy business headlines and an ugly stock market sell-off, Potash Corp./Saskatchewan Inc (TSX:POT)(NYSE:POT) delivered one of the few pieces of good news.
Even as other companies were bracing for a slowdown, the world’s largest potash miner announced a 9% dividend hike, citing “record potash sales volumes” and “the confidence we have in our business model.”
This should not have surprised anybody. The past decade, where booming food demand sparked a shortage of fertilizer ingredients, has been especially rewarding for shareholders. Over that time, the company’s payout has soared more than 22-fold, to an annualized rate of $1.52 per share.
But here’s the crazy part: this company might just be getting started.
While investors shouldn’t count on such exceptional growth in the future, analysts expect many more dividend hikes in the months and years ahead.
Short term, Potash Corp. is about to start gushing cash flow. The company is wrapping up its US$8.3 billion expansion program, which includes additions to several mines. That could pave the way for more capital to be returned to shareholders as investment spending is dialed down.
“With our potash expansion program nearing completion, our Board and management team continue to review our future cash flow potential and the best opportunities to provide superior returns to our shareholders.” President and Chief Executive Officer Jochen Tilk said in a statement. He then hinted “that dividends will continue as an important element of our capital allocation strategy.”
But things start to get really exciting when you look further out. The world’s population is expected to surpass 9 billion people by 2050. According to estimates by the Economist, we are going to need to produce more food in the next 40 years than humanity’s total output in the previous 10,000 years combined.
And in spite of ongoing advances in technology, nature is approaching its limits. Top soil is eroding. Water tables are nearly depleted. Global warming is wreaking havoc on production.
To grow more food on less land, farmers now need ever greater quantities of fertilizer. That’s why potash prices, a key ingredient, have soared more than threefold since 2000. Producers like Potash Corp. are poised to make a fortune.
“As we look ahead, we see a supportive market environment – most notably in potash,” Mr. Tilk continued, “We are ready to respond should demand for this nutrient prove stronger than expected.”
So, is Potash Corp. a sure thing? Hardly. Commodity markets are notoriously cyclical. Periodic supply gluts can devastate fertilizer prices, hammering Potash Corp. shares in kind.
Another risk is a business slowdown, especially in emerging markets. The bull case for Potash Corp. depends upon more people switching to a resource-hungry, meat-based diet. But if growth in places like China and India shifts down, that could mean fewer dividend hikes for shareholders.
That said, this stock – which is currently yielding about 4.2% – offers a tempting combination of yield and growth. The tailwinds behind this company could drive dividend hikes to the end of the century.
That’s why Potash Corp. is one stock to buy and hold forever.
