Shares of Potash Corp./Saskatchewan Inc. (TSX:POT)(NYSE:POT) have been under pressure for the past three months, but long-term dividend investors should see the pullback as an opportunity to buy the stock.
Here’s why:
1. More people and less arable land
The global population in 2015 is estimated to be a bit higher than seven billion. That’s already a lot of people, but experts believe the number could hit 11 billion by 2050.
While the global family continues to expand, the amount of land available to grow food is rapidly disappearing as suburbs pop up to house all the new people.
If we just had to feed humans, things might not be so bad, but an expanding demand for meat is pushing farmers to allocate more production for crops to feed livestock.
This all means that farmers have to squeeze as much production as possible out of every piece of land, and to do that, they use fertilizers.
Potash is an important part of the mix and demand for it is increasing at a healthy clip. In fact, global potash shipments hit a record 61 million tonnes last year and the outlook for 2015 is expected to be about the same.
2. Expansion projects
Potash Corp. is in the process of wrapping up a multi-billion dollar expansion program at a number of its facilities. This is great news for dividend investors because distributions are normally paid out of free cash flow that is available after capital expenses are paid.
As Potash Corp. shifts its projects from development to production, shareholders should see a double boost to funds available for distribution. Less money will be spent on capital projects and the added production should drive higher revenues.
3. Dividend growth
Potash Corp. recently increased the dividend by 9% to US$1.52 per share. That’s good for a 4.7% yield. Once the expansion projects ramp up production, investors should see continued increases to the payout in the coming years.
Risks
Investing in Potash Corp. isn’t without some short-term risks. The stock has been under pressure in recent months as a result of surprise tax changes by the Saskatchewan government. Markets are also unimpressed with weaker-than-expected prices caused by a global battle for market share.
The tax hit is connected to write-offs for capital programs and Potash Corp. expects the impact to be smaller next year. The price wars could last into 2016, so investors should expect margins to be a bit lower in the near term.
