High dividends and future price gains make Potash a bargain

We continue to include Potash Corp. of Saskatchewan (TSX─POT; NYSE─POT), among our best buys for income.

In December we wrote, “It’s important to hold some resources stocks for proper diversification. The trouble is most commodity prices have fallen.” Many commodity producers cut their dividends. As we wrote, “In Potash Corp.’s case, however, its earnings exceed the dividends. As a result, it can afford to pay the dividends”.

In fact, Potash Corp. has raised its dividend by 8.6 per cent, to US$1.52 a share. It remains a ‘dividend aristocrat’. Its dividends yield an attractive 4.2 per cent. President and chief executive officer Jochen Tilk says, “With our potash expansion program nearing completion, our board and management team continue to review our future cash flow potential and the best policies to provide superior returns to our shareholders. This increase reflects the confidence we have in our business model and the belief that dividends will continue as an important element of our capital allocation strategy.”

In 2014, it sold more at lower prices

In 2014, Potash Corp. earned $1.536 billion, or $1.82 a share (all figures in U.S. dollars unless preceded by a C). This was down by 10.8 per cent from earnings of $1.785 billion, or $2.04 a share, the year before. The company sold higher volumes, but the benefit was more than offset by lower prices.

Potash Corp.’s earnings per share fell less than total income. That’s because it spent $1.065 billion buying back its own shares. This was only slightly offset by the issuance of shares for $36 million. The number of shares fell by 25,873,751 last year. At the start of 2014, there remained over 830 million shares.

In 2014, Potash Corp.’s cash flow declined by 5.8 per cent, to $2.704 billion. This confirms its lower earnings. Still, this cash flow exceeded investment of $1.16 billion and dividend payments of $1.141 billion. The company’s leftover cash came to $463 million. This helped finance the share buybacks.

Potash Corp.’s net debt-to-cash-flow ratio was under 1.5 times. This is within our comfort zone of two times or less. Low debt gives the company financial flexibility and the means to keep rewarding you.

Mr. Tilk is optimistic about Potash Corp.’s outlook. He says, “As we look ahead, we see a supportive market environment—most notably in potash.” In fact, the company achieved a record volume of shipments in the fourth quarter. It also gained market share from “potential production constraints among certain competitors”. This refers mostly to Uralkali, which suffered from a flood.

Mr. Tilk adds, “We are ready to respond should demand for [potash] prove stronger than expected and, as we balance operational flexibility with efficiencies, we believe PotashCorp. is well-positioned should conditions be more challenging.” This efficiency is likely to reduce the company’s cost and thereby increase its profits. In addition, we expect Potash Corp.’s freight, transportation and distribution costs to decline.

In 2015, Potash Corp. expects to earn from $1.90 to $2.20 a share. The mid-point is $2.05 a share. Convert that to Canadian currency and you come up with an earnings estimate of C$2.61 a share. PotashCorp remains a bargain for attractive and growing dividend income as well as long-term share price gains.

 

The Investment Reporter, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846