Will Potash Corporation of Saskatchewan Inc. Raise its Dividend in 2017?

Potash Corporation of Saskatchewan Inc.’s (TSX:POT)(NYSE:POT) dividend may still not be as safe as you think.

| More on:
The Motley Fool

Income investors won’t forgive Potash Corporation of Saskatchewan Inc. (TSX:POT)(NYSE:POT) easily for 2016. The fertilizer giant slashed its dividend not once, but twice last year, shaking income investors’ faith in what was considered to be one of the most reliable dividend stocks around. From +6% dividend yields, Potash Corp. is now yielding only 2%.

The question bothering income investors now is whether Potash Corp. will give them another shock this year or surprise with a dividend hike as business conditions improve. Let’s find out.

Potash Corp.’s problem was its dividend policy

Potash Corp.’s dividend cuts were steep; the first was 34% and the second a whopping 60%. The weak business environment wasn’t really to blame. (How did peers Agrium Inc. (TSX:AGU)(NYSE:AGU) and Mosaic Co (NYSE:MOS) maintain their dividends despite operating in a similar challenging environment?) The problem was in Potash Corp.’s aggressive dividend policy.

Unlike Agrium or Mosaic, which maintained payout ratios blow 50%, Potash Corp. paid out its entire earnings in dividends in 2015. With the company hitting a 100% payout ratio at a time when the fertilizer markets were deteriorating, it was left with only two options: slash the dividend or burn cash and pay more than it earned. With earnings falling rapidly, Potash Corp. announced its first-ever dividend cut in history in January 2016.

Sadly, management still didn’t foresee what was coming and intended to maintain a payout close to 100% for the year. In July, Potash Corp. had to announce yet another dividend cut along with a big downgrade of its earnings projection for the full year.

So where does Potash Corp.’s payout ratio stand now? You wouldn’t want to know.

Potash Corp.’s dividends still look precarious

Potash Corp. paid nearly US$1 billion in dividends against net income and free cash flow (FCF) worth only about US$478 million and US$458 million, respectively, during the trailing 12 months. It’s an ugly picture.

POT Dividends Paid (TTM) Chart

That huge gap in dividends and FCF tells us that the company still has a long way to go to bring its dividends down to sustainable levels. This year, Potash Corp.’s earnings could improve as fertilizer prices stabilize and the company brings its lowest-cost mine at Rocanville online.

Potash Corp.’s impending merger with Agrium, if completed, will also be beneficial as it should reduce Potash Corp.’s exposure to the volatile fertilizer markets. On the flip side, I don’t see potash prices recovering much, and I’m also apprehensive about demand from key consumers China and India. If both countries delay contracts like last year, Potash Corp.’s volumes and top line could come under pressure.

Potash Corp. may not decrease its dividend again in 2017 as it finds support in Agrium’s cash flows after the merger, but I don’t see a hike coming either. After a dividend policy that went horribly wrong, Potash Corp. management will be more cautious than ever before announcing a dividend raise again.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Neha Chamaria has no position in any stocks mentioned. Agrium is a recommendation of Stock Advisor Canada.

More on Dividend Stocks

Canadian Dollars bills
Dividend Stocks

3 Monthly-Paying Dividend Stocks to Boost Your Passive Income

Given their healthy cash flows and high yields, these three monthly-paying dividend stocks could boost your passive income.

Read more »

Make a choice, path to success, sign
Dividend Stocks

The TFSA Blueprint to Generate $3,695.48 in Yearly Passive Income

The blueprint to generate yearly passive income in a TFSA is to maximize the contribution limits.

Read more »

hand stacks coins
Dividend Stocks

3 Ultra-High-Yield Dividend Stocks You Can Buy and Hold for a Decade

These three high-yield dividend stocks still have some work to do, but each are in steady areas that are only…

Read more »

senior man and woman stretch their legs on yoga mats outside
Dividend Stocks

TFSA: 2 Canadian Stocks to Buy and Hold Forever

Here are 2 TFSA-worthy Canadian stocks. Which one is a good buy for your TFSA today?

Read more »

calculate and analyze stock
Dividend Stocks

This 5.5% Dividend Stock Pays Cash Every Single Month!

This REIT may offer monthly dividends, but don't forget about the potential returns in the growth industry its involved with.

Read more »

Silver coins fall into a piggy bank.
Dividend Stocks

How to Use Your TFSA to Earn up to $6,000 Per Year in Tax-Free Passive Income

A high return doesn't mean you have to make a high investment -- or a risky one -- especially with…

Read more »

path road success business
Dividend Stocks

2 High-Yield Dividend Stocks to Buy Hand Over Fist and 1 to Avoid

High yields are great and all, but only if returns come with them. And while two of these might, another…

Read more »

Man holds Canadian dollars in differing amounts
Dividend Stocks

This 7% Dividend Stock Pays Cash Every Month

A high dividend yield isn't everything. But when it pays out each month and offers this stability, it's worth considering!

Read more »