Last year was rough for Potash Corporation of Saskatchewan Inc. (TSX:POT)(NYSE:POT), and it doesn’t look like 2016 is going to be any better. It had to cut its dividend by 34% to US$1 per share. This move has its positives because at least it means the company isn’t distributing more than it takes in. However, this cut might not be enough.
To make matters worse, according to analyst firm Macquarie, the company’s stock should drop an additional 12% based on where the price of potash is going. For investors who’ve held this stock for a few years, this uncertainty is maddening.
But the question remains: Is this stock a safe buy for the dividend?
The good news is that potash demand is expected to be nearly 60 million tonnes, which is right around where demand has been for the past two years. The bad news is that the top potash suppliers are fighting for market share. When there is competition, the price of the commodity drops. Producers have pushed the price down 25%, and it’s likely going to go a bit lower.
All of that aside, Potash Corporation is one of the leading low-cost producers of potash, so it is able to stomach the tough economic times it’s facing. However, there are large environmental and macroeconomic issues that the company can’t really deal with.
India, which usually has its supply contract squared away by April, stated that it wouldn’t negotiate until the summer because of a significant drought in the country, which is pushing demand lower. Analysts expect that demand from the country will be approximately 3.5 million tonnes, which is lower than the four million tonnes needed in 2015.
Then there is China, which is the largest consumer and importer of potash on the planet. Because of its position as the leading buyer, it gets to dictate a lot of the pricing. Analysts predict that it could pay anywhere between US$270 and US$280 per tonne. However, because China already has a supply, it may look to push the price even lower since it has the negotiating power.
Is the dividend secure?
The security of the dividend depends on where the numbers drop as the year goes on. The company’s 2016 earnings guidance was between US$0.90 and US$1.20 per share. If those numbers are true, it will have to pay out 100% of its earnings in dividends.
However, if that guidance is missed because of India and China not negotiating or pushing for lower prices, the company might be in a tough position. It may have to either pull from its credit lines or cut the dividend again.
The reality is simple … Potash Corporation could survive the low prices of 2016. It is an efficient company that has a lot of capital programs coming to an end, so money is going to be freed up. However, if the market doesn’t start to turn around for the resource, Potash Corporation may be forced to cut its dividend again.
Therefore, it’s likely a smart move to avoid this stock until there is more certainty about the company and its commodity. However, many investors have gotten rich seeing through the mess for the opportunities, and a 6.2% yield might just be that opportunity.
