The Agricultural Input industry had been depressed over the past two years due to the supply and demand dynamics. The industry has been facing an oversupply of fertilizers products, which has pushed down the prices for potash, nitrogen and phosphate. This situation occurred because India and China, the largest importers of these products, increased their domestic production and Indian authorities offered high subsidies on nitrogen-based fertilizers instead of potash. Thus, multinational companies like Potash Corporation of Saskatchewan Inc (NYSE:POT) and Mosaic (NYSE:MOS) saw earnings suffer due to a decrease in demand.
This situation resulted in a huge decline in the price of agricultural inputs, which negatively affected revenues, margins and the growth plans of many global companies. Let's take a look at Potash Corporation to see how it is operating in these challenging circumstances. First let's analyze how it is supporting its financial position and dividend growth to determine if it is a safe pick for dividend growth investors. Then we will look at Mosaic to gauge how it operates and if it is a better investment than Potash.
Where Does Potash Stand?
Potash is one of the companies that saw the price of its front line products like potash and phosphate decreased dramatically. The decrease in prices pushed its margins way down, and its earnings fell from $3.51 per share in 2011 to $2.04 per share in 2013 with a forecast of $1.80 per share in 2014. Potash is a diversified company with a good mix of products. Last year, it increased its ammonia capacity, which helped it offset pricing pressures and increase sales volume. In addition, its diversity of phosphate products offered some relief, and its feed and industrial business also helped it to overcome pricing pressures. Further, it suspended its growth plans and is looking to lower its capital expenditures. Potash will focus on increasing production from existing assets while lowering the cost of goods sold in order to increase margins.
In the first quarter, the market responded relatively well in terms of demand, and thus price. The company reported better results than the expected. It had earnings of $0.40 per share. The worldwide market for potash remains strong, but the winter season created supply problems. The company is seeing strong demand for potash in North America, China, Malaysia, Indonesia and other Asian regions. In nitrogen, the company's sales volume increased by 10% due to the production of ammonia at its Geismer Plant. Unfortunately, the market conditions for phosphate are still challenging.
Where Does Mosaic Stand?
Mosaic's revenue generation is also based on the sale of potash and phosphate. Thus, it too is experiencing headwinds because of price instability. Mosaic's revenue and earnings fell significantly over the past two year, down by more than 50% from $2.5 billion in 2011 to $1.1 billion in 2013. In order to handle the negative pricing environment, the company increased its production volumes and lowered its costs. Mosaic's capital expenditures remain high, as it is focusing on expanding production. It recently acquired the phosphate business of CF Industries, and is in the process of acquiring Archer Daniel Midlands (NYSE:ADM) fertilizer distribution business in Brazil. These acquisitions will expand its distribution capacity by 4 to 6 million tons in Brazil. Amid this, Mosaic's financial performance continues to be poor because it had to slash prices, even though it has been making strong shipments globally. In the first quarter both its revenues and earnings were lower than in the first quarter of 2013.
Which Company is in a Better Position?
Demand for agricultural inputs including potash, phosphate and nitrogen is increasing particularly in North America, South East Asia, China and Brazil, and thus prices are stabilizing, but it is unlikely that they will move as high as they did before 2011. Companies that offer these products are increasing their productions and lowering their cost to offset the impact of the current depressed prices.
Potash has adopted a smart strategy to deal with today's uncertain circumstances. The company has significantly reduced its capital investments while increasing production from existing assets at lower costs. Amid this, it is expecting to generate earnings around $1.80 per share which is significantly less than in prior periods. With the fall in its top and bottom lines, its cash flow also turned to a negative growth. The company has paid a quarterly dividend of $0.35 over the past four quarter. At the moment, its free cash flow is not enough to continue its current dividend growth. At the end of the first quarter its free cash flow was $313 million and its dividend payment was $293 million. Similarly, its payout ratio based on income is 80%.
On the other hand, over the past seven quarters, Mosaic has paid a quarterly dividend of $0.25. Its cash flows are coming down, but it is still making more capital investments than Potash, and its cash flow situation looks strong, as its free cash is twice as high as its dividend payment. Its payout ratio is also low at 36%. Further, its aggressive focus on stock buybacks will reduce its dividend payments.
Over the last three years, Potash has made significant increases in its annual dividend payments. Thus, when earnings slowed, its free cash flows came down while its dividend payments were going up, which will make it difficult for the company to make additional dividend increases. In my view, Mosaic and Potash both have the potential to sustain dividends, but I am not expecting any significant increase from them because of their negative top and bottom line growth. Both companies' earnings are dependent on potash and phosphate prices, and I do not expect them to move higher in the short-term.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.