Potash Corporation of Saskatchewan Inc.: Can Investors Count On the 6% Yield?

Here’s what investors need to know before buying Potash Corporation of Saskatchewan Inc. (TSX:POT)(NYSE:POT).

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The Motley Fool

Potash Corporation of Saskatchewan Inc. (TSX:POT)(NYSE:POT) recently slashed its dividend to preserve capital as it battles through low prices in the fertilizer market.

The stock is starting to attract contrarian buyers as well as investors looking for a dividend play with some upside potential, but Potash still carries some risks.

Let’s take a look at the current situation to see if this is the right time to put Potash in your dividend portfolio.

Earnings woes

Potash delivered ugly Q4 2015 results as the extended downturn in fertilizer prices and reduced output hit revenues and margins.

The company posted Q4 earnings of US$201 million, or US$0.24 per share, a sharp decrease from the US$0.49 it earned in Q4 2014.

The difficult times are expected to continue.

Potash believes total global potash shipments will be 59-62 million tonnes in 2016, which would be in line with the numbers for the past two years, but prices are down 25% from last year, and there is little indication of a rebound in the near term.

In fact, recent news out of India suggests the assumptions for the year might be a tad optimistic.

India just announced it will halt Potash imports until the end of March and is putting off negotiations for new supply contracts until June. The company normally begins talks with suppliers in February and usually has a deal in place by April.

Successive droughts have slowed the planting of India’s crops. This means the country’s potash imports are likely to come in lower than the average four million tonnes per year.

According to a statement made by the managing director of the country’s largest importer, just 3.5 million tonnes will be imported for the fiscal year beginning in April 2016.

How does this affect Potash?

India is the destination for about 5% of all the potash produced in Saskatchewan, so the impact on sales volumes is negligible, but there are broader implications.

Contracts negotiated with China and India normally set the benchmark for the rest of the industry. As a result, India’s decision to restrict imports and delay the contract negotiations could drive prices even lower. Potash prices are already at eight-year lows near US$230 a tonne.

Dividend safety?

Potash reduced its quarterly dividend by 34% to US$0.25 per share. That puts the payout ratio at 100% based on the company’s expected earnings of US$0.90-1.20 per share for the year.

If conditions in the market continue to deteriorate, management might decide to trim the distribution again before the end of the year.

Should you buy?

The long-term outlook for the fertilizer space is positive, but the market is still on a downward slide, and it could be a couple of years before things start to turn around.

Contrarian investors might want to start nibbling, but there probably isn’t a rush to add the stock to your portfolio. Dividend investors should look elsewhere for yield opportunities.

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 Andrew Walker owns shares of Potash Corporation.

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