Potash Corporation of Saskatchewan (POT) is what we discuss in this follow-up article on high-yielding equities.
Due to a quarterly dividend of $0.35, in reality 4.47% is what this $30 billion market company is currently yielding. This is squarely higher than the 3.62% that the 30-year treasury is yielding at the time of writing! Yet, examining the dividends history may cause a long-term dividends investor to immediately discount the company as not worthy of being listed with the likes of NLY, MO, T, VZ, NGG, and BP, which we discussed in earlier articles of this series.
Yes, the dividends history is a cause of serious concern due to at least a couple of issues. Firstly, it is clear that dividends payout was never high on the company's priority list, till very recently. If you examine the history, you will find that -- considering the company had a 3-1 split effective 2/25/2011 -- the yield was almost non-notable till the latter part of 2012, even though the company was running its most profitable years prior to that.
Secondly, even in the good years -- again note that there was another 3-1 stock split effective 5/30/2007 -- there was not a culture of growing dividends. Yet, here is where we are: 4.47% yielding company!
I have taken the liberty of augmenting data from the history link above to the POT price history and arrived at this historic yield table.
|ExDiv Date||Cash Amount||Day-Before ExDiv Closing Stock Price||Effective Yield|
The comforting part is that there were payout increases after the significant recent price drops in the stock price and not only "yield" increases. You see, a yield trap that people frequently fall into is that they look at the high yield of a depressed company and think that it is good. In reality that would be due to the company being in severe trouble. Invariably, the company would end up cutting their payout and the investor is stock with a low-quality, low-yielding stock. This does not seem to be the case here, as the company clearly increased the payout at lower stock prices.
The above discussion reveals that the risk you are taking is whether the new emphasis on dividends payout by the company is a folklore move to entice interest or it is a fundamental change in the mindset of the company.
In his reply to the Governor of Saskatchewan, POT's CEO did indicate that the dividends payout is "sacrosanct!" Considering that Mr. Doyle was the CEO when the company, according to my analysis above, did not pay significant dividends -- even though Mr. Doyle in 2007 made $320 million in total compensation package -- dividends sanctity is a risk that you have to decide upon yourself. I cannot discern that from my analysis here, given this schizophrenic historic behavior.
The company is a Canadian company that is around 40 years old. It became a publicly-traded company in 1990 after the Government of Saskatchewan divested its shares. Its control and hold on the chemical fertilizer industry (Potash, Phosphate, and Nitrogen) in general and the Potash in particular is unparalleled. Or at least, was. The company owns subsidiaries and operations in several locations, including significant operations in the Middle East.
The company itself was the subject of a takeover bid by BHP Billiton (BHP) in 2010. That did not materialize, partly because of government objections. As we stand now, of its competitors, the one that seems to represent any threat is the $14 billion in market cap Uralkali (OTC:URALL).
We start our discussion with management. Let us use the 2012 annual report and the company website for that. The first thing that strikes you is that both the board of directors and the executive team look like a club. This is one of the taboos I look for in considering management. The diversity we have seen in most companies we considered in this series is not there; not to take from the qualifications of the directors and the executive teams.
The second issue that strikes me is the lack of candidness when it comes to executive and board compensation -- which you can more easily get summarized here. This is a U.S.-listed company that files with the SEC. Hence I would have expected POT to be much more forthcoming when it comes to such issues.
Finally, it seems that many in this group have been with the company since inception. Given the current challenges facing the company, it appears to an outside observer that "new blood" is needed to get things moving outside of the pattern POT is stuck in, as the technical analysis below indicates.
Moving to finances, we resort to the last SEC-filed quarterly report.
The company lists -- page 1 -- close to $18 billion in equity, with a negligible intangible portion, which is a positive. It also lists around $8 billion in liabilities, with long- and short-term debt being about 1/3 of that. The numbers compare well with end-of-year (2012) numbers, so no particular red flags are raised. One issue though, the receivables, payables and deferred tax numbers will need to be looked at again once the full-year annual report is available.
The cash flow review -- pages 2 to 4 -- is less flattering though. You see, I view agricultural chemicals as seasonal, and hence year-ago comparisons are important. The 9-month period seems reasonable, with a revenue drop of 8% year-to-year. Yet, the 3-months ending September 30th comparison were brutal. The drop there is almost 30% on total revenue and close to 50% on pretax income.
The story here gets bothersome as the total for the quarter is reported as a loss due mainly to losses in "available for sale investments." This is true for both the 3-month and the 9-month periods. Effectively, the company's investments have failed POT in this quarter.
Additionally, page 4 tests the limits of knowledge in accounting. You see, Depreciation and Amortization "adds" to net income, and I do not see a note explaining why D&A is positive not negative, as I would normally expect it.
Finally, segment breakup -- on pages 9 and 10 -- is also alarming, as the comparisons with 2012 show that "all" segments -- potash, phosphate and nitrogen -- suffered. In particular, given the price charts of the raw materials (discussed below), I would have guessed that it is phosphate that has suffered most. Instead, most of the damage was in potash sales. In effect, POT delivered lower sales on higher assets in potash. Further, most of the damage seems to be related to Q3.
As such, it is important for you as an investor to run similar analysis to check if Q3-2012 was a one-off or the harbinger of things to come!
To discern company prospects, one has to examine the prices of their most valued commodities, Potash and Phosphate. Looking at the next graphs, one cannot arrive at a comfort level concerning these. It is clear that the prices are, and have been, in a continual slump since the heights of 2007, and in particular for Phosphate.
As such, a POT investor, with hopes of 2007/2008 stock prices returning, should not entertain such thoughts without a confirming commodity price recovery. Above charts are clear that this recovery is not forthcoming. In particular, in the potash business, URALL is kicking in as a serious competitor. While for the phosphate business, new reserves and production facilities, in particular in the Middle East, will keep prices of that commodity depressed for some time to come.
More demand for agricultural chemicals may soften the blow, but I cannot see how it will reverse the above noted trends.
Charting and technical analysis paint a worse picture for the company than the actual financial analysis above, or, for that matter, the commodity price charts above.
Just look at the monthly 10-year chart below and you see what I mean.
The chart reflects two behaviors we did not see in previous articles. The first is that the demise in stock price was actually "prior" to the Financial Crisis and coincided with the commodity price collapse of mid-2008. Actually, POT stock price improved a bit after the financial crisis -- prior to general market recovery -- as did many commodity prices and stocks.
The second more worrisome behavior is the step-like behavior of the stock price that does not entirely correlate to the commodity prices in previous charts. In essence this suggests that the market believes that the company is well priced at these levels, and for prolonged times each incident. Note that in each of these periods, the following price level was lower than the prior! In essence, such behavior negates any quick hopes of stock price appreciation.
To examine more recent price action let us, as usual, look at the weekly 3-year chart.
Here, again, you see a similar pattern. Even though the negative trend is less apparent, the step-like price levels are evident and the "resistance" they seem to represent at each stage has proven quite formidable.
In conclusion, Potash is a company that is no longer one-of-a-kind. This is true for the commodities it mines too. Hence, I am more comfortable using POT for "trading" and not for long-term investing purposes. In essence, as a dividends investor, you will need to be more concerned about the capital preservation part of the equation, as the dividends continuity angle seems to have been covered by the new company attitude of considering dividends to be "sacrosanct."
On this capital preservation issue, it behooves the investor to follow market prices and trends of Potash, Nitrogen and Phosphate and infer from that a good entry point, if any, into a long-term position in POT.