Potash: Nice Dividend, Big Upside

Potash (POT) cut its dividend twice this year, and it is underperforming the S&P 500 by more than 13%. As contrarian investors, we believe it’s now an attractive stock, with a nice dividend (2.5%), and big long-term price appreciation potential. Potash is particularly attractive because of it low cost mines, continuing long-term growth in global demand, and the current low point in the fertilizer business cycle.

Overview and Business Environment
Potash produces crop fertilizers including potash, nitrogen and phosphate. Weaker prices across all three of these fertilizers have been a big driver of the company’s recent stock price declines (Potash’s stock price is down 41.1% over the last year). For example, the following chart shows the historical declines in potash prices since 2011.

And worth noting, the above chart only goes through April of this year, but Potash reported during its recent second quarter earnings announcement that their average realized price for potash had fallen further to $154 per tonne.

The other big driver of the company’s recent stock price declines has been lower sales volumes. Specifically, “Sales volumes for both the quarter (2.1 million tonnes) and first half (3.9 million tonnes) were lower than those in 2015, down 16 percent and 20 percent, respectively.”

The story has been largely the same for nitrogen and phosphate. Specifically, weaker prices and lower sales volumes have taken their toll on the company. The following chart provides additional color on how current market conditions have impacted Potash.

And in light of market challenges, Potash has worked to protect its balance sheet by lowering its quarterly dividend for the second time this year. The dividend went from $0.38 per share, to $0.25 per share, and most recently to $0.10 per share (this amounts to approximately at 2.5% annual dividend yield).

Business Should Improve for Potash
We believe business should improve for Potash in both the near- and long-term. For example, in the near-term Potash believes their market has bottomed, and their business should improve because of increased market certainty and due to lower inventories across the supply chain. Potash’s second quarter earnings release provides more detail: 

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Disclosure: None.

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