is there danger lurking in potash corp.’s dividend?
TRANSCRIPT
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Is There Danger Lurking in
Potash Corp.’s Dividend?
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Potash Corp. raised its quarterly dividend by 9% in January, putting its annual dividend at $1.52 per share. That’s a 525% jump since 2011.
Latest dividend boost
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Solid track record
Data source: Company financials. Chart by author
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Dividend yield
Thanks to regular dividend increases and the recent drop in its stock price, Potash Corp.’s dividend yield is the highest in the industry today.
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At record highs
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Dividend payout
Potash Corp. also has the highest dividend payout ratio (percentage of profit paid out as dividend) among peers.
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Highest in the industry
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The question is:
Can Potash Corp. continue to reward shareholders with higher dividends?
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Let’s find out
A quick look at Potash Corp’s debt position, cash flows, and dividend payment history can give us an answer.
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Debt
Potash Corp’s long-term debt has declined substantially since 2011.
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Deleveraging
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Cash flows
Meanwhile, the company’s free cash flow is growing steadily.
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Steady growth
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Lower capex = Higher FCF
That’s because Potash Corp.’s capital expenditures have been on the decline as it nears completion of a multi-year expansion program costing nearly $8.4 billion.
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Declining capex
Source: Potash Corp. 2014 Annual Integrated Report
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No mean feat
It’s also worth noting that Potash Corp. generated nearly as much in free cash flow as net income over the past couple of years.
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A green flag
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A green flag
That’s an encouraging sign since a company pays dividends out of its free cash flow.
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Dividend history
Potash Corp.’s strong dividend history further strengthens its case.
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Potash Corp. has:
paid a dividend every quarter since 1990
grown its annual dividend more than 11 times since 2010
increased its payout substantially in recent years
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To summarize: Potash Corp.
Is cash flow positiveIs deleveraging while growing its cash flowsExpects significant FCF growth in coming years as capital spending tapers
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Foolish takeaway: No risk
A high payout ratio may leave little room for growth, but strong potential cash flows, coupled with reducing debt, should ensure that Potash Corp. can reward its shareholders with handsome dividends going forward even in weak industry conditions.
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