Potash Corp./Saskatchewan Inc. (TSX:POT)(NYSE:POT) is down 17% since the start of the year, and dividend investors are wondering if they should buy the stock.
Let’s take a look at the current situation to see if Potash Corp. deserves to be in your portfolio.
Earnings
The company’s Q2 2015 earnings came in at $0.50 per share, down from $0.56 per share in the second quarter of 2014. The results hit the midpoint of the company’s guidance for the quarter, but fell short of last year’s results, mostly due to weak prices in the nitrogen segment.
Global potash demand remains strong and prices are improving. Through the first half of this year, the company shipped record quantities of potash to international customers, and management believes that trend should continue through the end of 2015.
The strong overseas performance was offset by lower sales in North America. Offshore suppliers flooded the market with cheaper product this spring, and the 2015 planting season was quite short. The company anticipates an acceleration of North American shipments in the second half of the year.
The Q2 average realized potash price rose to $273 per tonne, up from $263 per tonne in 2014.
Total global potash shipments should come in at 60 million tonnes for 2015, essentially in line with the 61 million tonnes sold in 2014.
Nitrogen sales volumes in the second quarter were flat compared with Q2 2014, but gross margins dropped 27% due to weak global prices. Potash Corp. still makes good money on its nitrogen operations. The average realized price of $334 per tonne was much lower than the $393 per tonne the company received last year, but the cost of goods sold averaged just $201 per tonne for the quarter compared with $213 per tonne a year ago.
Phosphate sales were the bright spot for the quarter, with gross margins rising 50% to $72 million for the second quarter.
Capital programs
Potash Corp. is wrapping up a series of multi-billion expansion projects, and that should free up significant cash flow moving forward. This is important because it should ensure free cash flow is more than adequate to support the dividend.
The company reduced its earnings guidance in the first quarter after the Saskatchewan government changed tax rules on how Potash Corp. producers can expense capital projects.
The negative effects of the change should be less in 2016.
Dividend
Potash Corp. pays a quarterly dividend of US$0.38 per share that yields about 5.8%. The company has increased the payout substantially in recent years. Further dividend hikes will depend on how fast prices recover in the crop nutrients markets.
Should you buy Potash Corp.?
The long-term outlook for food demand suggests demand for Potash Corp.’s products will continue to grow.
Potash Corp. says full-year earnings for 2015 should come in at $1.75-1.95 per share. Capital expenditures are expected to be $1.2 billion. The company spent just over $300 million in the second quarter.
Operating cash flow in the second quarter was $836 million and free cash flow was $532 million. The company paid out dividends of $312 million, so the distribution is well covered even in a challenging environment.
The shares now trade at an attractive 13 times forward earnings. Volatility could continue in the near term, but the overall outlook for the stock is good. Investors with a long-term horizon should be comfortable adding Potash Corp. to their portfolios at the current price.
