Whenever a yield gets unusually high, such as with Potash Corporation of Saskatchewan Inc. (TSX:POT)(NYSE:POT), you have to wonder whether or not the company will be able to pay that yield to its investors.
It’s my belief that investors are in a fine position with Potash Corp. and, in actuality, this recent drop in price is a solid opportunity for investors. Here are a few reasons to support that argument.
1. Demand for potash will increase
Things are going to be tough for the company because there is a lot of supply of potash. However, what puts Potash Corp. in a good position is the fact that it is such a low-cost provider, so it will be able to withstand these next few years.
The long-term demand for potash, though, could be significant. With India and China developing a large middle class, people are going to require high-quality food. To ensure that demand can be sustained, farmers will need high-quality fertilizers. Potash is a needed ingredient for these fertilizers.
2. Big investments are coming to an end
Part of what was holding the balance sheet down was the fact that the company had initiated an incredibly ambitious investment strategy in 2003 that resulted in $8.4 billion being spent to increase production. This investment is finally coming to an end with the company increasing production to 18 million tonnes.
This is important for two reasons. The first is because it gives Potash Corp. even more supply for when demand does start to increase. The other reason is because operating costs drop as these investments come online. That means that the company will be able to generate more cash flow.
3. The dividend is safe
For right now, the dividend is relatively safe. It pays US$0.49 per quarter, which gives it a 7% yield. Fortunately, the company makes enough money to cover both the dividend and its operational costs even with prices where they are.
If prices were to drop below $200 per tonne for a prolonged period of time, I could see the dividend getting cut. However, the company is a consistent-paying company. It has paid a dividend every quarter since 1990.
Should you buy?
I say yes. The price is reasonable, a lot of costs are going to finally disappear, and the dividend is incredibly lucrative. Therefore, buying this stock for the future could be one of the best investments you make. And with its 7% yield, the added income increases the safety of the stock.
