Is Potash Corporation of Saskatchewan Inc.’s Dividend Safe?

If Potash Corporation of Saskatchewan Inc. (TSX:POT)(NYSE:POT) can sell on the high end of its guidance, the dividend is safe. If not, the dividend could get cut again.

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The Motley Fool

Something we many of us here at Fool predicted finally happened when Potash Corporation of Saskatchewan Inc. (TSX:POT)(NYSE:POT) released its fourth-quarter results. Its earnings came in at $0.24 for the quarter, down 51% year over year, and the company realized it was hurting. Because of this, the company announced that it would be cutting its dividend by 34% to US$1 per share.

We had been questioning if the yield was safe, and the reality was that it wasn’t. The remaining question is, Can the company sustain its current dividend?

Again, that depends on how the potash market does. A year ago, the price per tonne was $284. In its most recent quarter, the price was $238. Analysts expect that the price should stay relatively flat or dip down to around $210. Part of the reason this is happening to the price is because demand is tepid. According to Potash Corp., it expects its volumes to be flat or drop.

Is the dividend safe?

This is where we come to the conclusion that the safety of the dividend remains uncertain. Potash Corp.’s annual bill for dividends is $840 million. That means that it needs to be able to keep the business operating from its cash flow and have, at the very least, $840 million left over.

According to Potash Corp., it expects to sell anywhere between 8.2 and 9.1 million tonnes. According to analysts at TD Bank, if the company sells on the lower end of its guidance, the company will be unable to pay the dividend. The price would need to rise to over $300 per tonne to cover the bill.

On the other hand, if analyst expectations are true, the company is likely to sell on the higher end of its guidance simply because demand is increasing. In 2015 demand was nearly 60 million tonnes. That should grow to 61-62 million tonnes this year. An increase in demand is an increase in volume for Potash Corp. If the company can sell at the high end of its guidance, the dividend is safe.

Therefore, I advise investors to pay attention to each quarter to see how well the company is selling potash. If it looks like Potash Corp. is not going to meet the high end of its guidance, it might be a good idea to get out of the company. However, if the company is able to continue growing its sales volumes in line with increased demand, this dividend should be safe.

The unfortunate reality is that dividend cuts sting. But the yield still remains a decent 6.36%. While I am not comfortable saying that this dividend is safe, I also don’t believe that the dividend will be cut again in 2016.

However, if you’re looking for a way to generate income without losing sleep, questioning if you’ll actually get your dividend, I advise looking at a different type of stock.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Jacob Donnelly has no position in any stocks mentioned.

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