Potash Corporation’s Dividend at Risk, Analysts Say
Low Fertilizer Prices Could Crimp Payout
Investors love Potash Corporation of Saskatchewan (USA)’s (NYSE:POT) lucrative dividend, but the company’s oversized payouts could be at risk.
At least, that’s according to the latest report by Accountability Research. In a report published Thursday, analysts Harriet Li and Mark Rosen noted conditions in the fertilizer market continue to deteriorate. If a long-delayed Chinese potash contract is not settled soon, the duo fears prices and global shipments of the crop nutrient may fall further. (Source: “Potash Corp.’s dividend increasingly at risk amid weak market,” Financial Post, June 16, 2016.)
None of which bodes well for Potash Corporation’s dividend. In January, management slashed the company’s dividend to just $1.00 per share. However, even this reduced payout looks aggressive after executives slashed their profit outlook to between $0.60 and $0.80 per share for the entire year.
“We caution that continued deterioration in the fertilizer markets puts the current dividend at risk,” the analysts wrote in a note. (Source: Ibid.)
Given executives are paying more cash to shareholders than what is being generated by the business, management’s current policy is not sustainable.
For Potash Corporation, flagging conditions leave executives with some tough decisions. To starve off a dividend cut, management could buy time by selling their stakes in other fertilizer businesses. The company could also conserve cash further by dialing back investment in new mines.
Neither of these options, though, is desirable. Slashing the payout for the second time in a year would disappoint investors. Asset sales and spending cuts would also leave Potash Corporation as a weaker, smaller company.
For that decision, shareholders will have to wait for the fertilizer maker’s next quarterly report in July.