Potash Corporation of Saskatchewan Inc.: Risks vs. Rewards

Potash Corporation of Saskatchewan Inc. (TSX:POT)(NYSE:POT) is down 50% over the past 12 months, and investors with a long-term strategy are wondering if this is a good time to pick up the stock.

Let’s take a look at the current situation to see if Potash Corp. deserves to be in your portfolio.

Weak commodity market

Market prices for fertilizers are under pressure, and that trend looks set to continue through 2016.

Potash, in particular, is selling at spot prices not seen in eight years, running about US$230 per tonne. The decline has been steady since 2012 as a perfect storm of negative factors has hit the market.

The 2013 dissolution of the Russia-Belarus marketing agreement has had the largest impact, pitting the former partners against each other in a nasty bid for global market share. Wholesale buyers such as China and India have taken advantage of the situation to negotiate better pricing.

At the same time, low crop prices combined with volatile currency moves have kept other buyers on the sidelines.

A weak loonie is helping Potash Corp. cope, but the drop in other currencies against the U.S. dollar is giving some competitors an even greater edge.

The dividend debate

Potash Corp. reduced its quarterly dividend by 34% to US$0.25 per share when it announced Q4 2015 earnings. The company provided 2016 earnings guidance of US$0.90-1.20 per share, which would mean the new payout ratio is going to be about 100%.

At this point, the dividend should be fine, but investors who are evaluating the company might want to treat the payout as a bonus when deciding whether or not they want to own the stock.

Should you buy?

The global fertilizer market is at a low point of the cycle, and there isn’t much indication that things are going to improve in the near term. In fact, the dividend could get cut again if the market slump continues well into next year.

Having said that, the tide will eventually turn and the long-term outlook is pretty good.

Population growth is expected to put pressure on farmers in the coming decades, and the best way to increase crop output is to load up the soil with fertilizer. Add in the fact that farmland is increasingly falling prey to urbanization, and you can see why fertilizer demand is likely to be strong.

Potash Corp. is a low-cost producer, and the company is near the end of a major capital program to ensure its mines are ready to meet future demand. That means there shouldn’t be a significant need to add debt going forward and more cash flow could be available for distributions or share buybacks.

I wouldn’t back up the truck, but it might be worthwhile to start nibbling on further weakness. The long-term upside potential makes this stock an interesting contrarian play.

Just released! One top stock for 2016 and beyond

Exports of liquefied natural gas could be one of the best growth opportunities out there for long-term investors. And, we think we’ve identified the Canadian company to invest in. It’s a global company with operations across nearly 20 countries and 70 locations. We like it so much, we’ve named it as 1 Top Stock for 2016 and Beyond. To find out why, click here now to learn how to access your FREE copy today!

Fool contributor Andrew Walker has no position in any stocks mentioned.

I consent to receiving information from The Motley Fool via email, direct mail, and occasional special offer phone calls. I understand I can unsubscribe from these updates at any time. Please read the Privacy Statement and Terms of Service for more information.