Potash Corp./Saskatchewan Inc. (TSX:POT)(NYSE:POT) is down nearly 20% since the beginning of the year, and dividend investors are now looking at the attractive yield and wondering if this is a good time to start a new position in the stock.
Let’s take a look at the company to see what’s going on.
Earnings hit
Potash Corp. reported Q2 2015 earnings of $0.50 per share, down from $0.56 per share during the same period last year.
The results were reasonable and came in around the mid-range of guidance. Most of the weakness was attributed to lower prices in the company’s nitrogen business.
Nitrogen sales volumes for the quarter were pretty much flat compared with Q2 2014, but margins dropped 27%. Potash Corp. is a low-cost producer of nitrogen, so the company is still making good money. The company’s average Q2 realized price for the fertilizer was $334 per tonne and the average cost of goods sold was $201 per tonne, down from $213 per tonne the previous year.
During the first quarter, Potash Corp. reduced its earnings guidance for the year because the Saskatchewan government changed the tax rules on how potash producers can expense capital projects. Potash Corp. expects the negative effects to decrease in 2016.
Potash demand is strong
The global potash market is currently oversupplied, but prices are finally improving.
Through the first half of the year, Potash Corp. shipped record levels of potash to its international customers, while sales in North America dropped off. The weak performance close to home was attributed to competitive pressure from overseas suppliers as well as a shortened planting season. Management expects the North American market to rebound through the second half of the year.
The Q2 average realized price was $273 per tonne, up from $263 per tonne in the second quarter of 2014.
Worldwide potash shipments hit a record 61 million tonnes in 2014 and sales this year are expected to be in line with that number.
Capital expenditures
Potash Corp. is in the process of wrapping up a number of multi-year expansion projects. This is important for dividend investors because the company should see a boost to free cash flow in the next couple of years as the facilities move from development to production.
Lower capex and higher revenue should mean more money available for dividends and share buybacks.
Acquisitions
Potash Corp. has made a US$8.6 billion bid to buy German potash producer K+S AG. The offer has been rejected on the basis of being too low, but the K+S shares are trading below the offer price, so the market disagrees with the Germany company’s management team.
The deal would give Potash Corp. geographic diversification while removing one competitor from the industry.
Dividend safety
Potash Corp. pays a dividend of US$0.38 per share that yields about 5.8%. The payout has increased substantially in recent years and further hikes will depend on how quickly prices recover.
Investors might not see a big hike again in the next year, but the dividend should be safe.
Operating cash flow in Q2 was $836 million and free cash flow was $532 million. The company paid out $312 million in dividends, so the distribution is adequately covered.
What should investors do?
Potash Corp. currently trades at an attractive 12.7 times forward earnings. If you already own the stock, I would hold it. New investors might want to consider planting a bit of Potash Corp. in their portfolios while the shares are still cheap.
