Potash Corporation of Saskatchewan Inc.: Is This the Right Time to Buy?

Potash Corporation of Saskatchewan Inc. (TSX:POT)(NYSE:POT) is down 40% in the past 12 months, and investors are wondering if the stock has finally bottomed out.

Let’s take a look at the current situation to see if this might be an opportune time to add the name to your portfolio.

Earnings woes

Potash prices are in a multi-year slump, and that has taken a toll on Potash Corp.’s margins.

The company reported Q1 2016 earnings of US$75 million, or US$0.09 per share. Full-year guidance was reduced to US$0.60-0.80 per share, and investors could get more bad news when the Q2 results come out on July 28.

Market outlook

Potash Corp. says the market should improve in the back half of 2016. The company’s most recent update projects global shipments to come in at 59-61 million tonnes this year–roughly in line with 2015.

Seven million tonnes of production is expected to come out of the system in the next four years, and Potash Corp. believes this will help offset any new capacity scheduled to hit the market over that time frame.

For the moment, prices remain under pressure. India recently secured its new contract for US$227 per tonne, far below the US$332 it paid last year. The deal will set a benchmark for other buyers, including China, and suppliers like Potash Corp. will have to readjust projections accordingly.

Overall, the near-term trend looks flat at best.

Dividend safety

Potash Corp. slashed its dividend earlier this year in a move to protect cash flow and bring the payout more in line with revenue expectations. The current annualized distribution of US$1.00 per share still looks a bit robust given the earnings outlook, and investors shouldn’t be surprised if the distribution gets another haircut when the Q2 numbers are announced.

At the moment, the payout offers a yield of 6%.

Takeover rumours

Potash Corp. is once again the subject of takeover rumours. The Canadian government blocked a previous buyout attempt by BHP Billiton Ltd., the most likely suitor, and another bid would probably result in the same decision.

Should you buy?

The pain could continue over the near term, but the long-term outlook for the fertilizer space is actually quite positive given expectations for growing food demand.

I would wait for the Q2 numbers to come out before starting a new position. If more bad news is in the cards, there might be an opportunity to get in at a lower price.

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Fool contributor Andrew Walkerowns shares of Potash Corporation.

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