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Potash Corp. of Saskatchewan (NYSE:POT)

Overview

It is the world's largest potash company, the 2nd largest nitrogen producer in the world and the 3rd largest phosphate producer in the world. Its success is attributed to a vital infrastructure, knowledgeable personnel and an excellent transportation network (that includes barges, ships, trucks, trains, etc.) and strategically located warehouses.

It also deals in solid and liquid phosphate fertilizers, industrial acids that are used in food products and animal feed supplements. It also holds the rights to mine 786,000 acres of land in Saskatchewan and an additional 58,263 acres in New Brunswick.

Reasons to be bullish on POT

  • For the 4th quarter of 2011 gross margins hit $2.7 billion, up over 50% year over year. The average price of $431 per tonne in the 4th quarter was almost $110 per tonne higher than year ago.
  • It is expanding operating in the New Brunswick plant; construction is expected to be completed by 2013 and will be fully operational by 2015; at this point, it will replace the existing underground operations, and this plant is expected to have a production capacity of 1.8 million tonnes.
  • As more than half of the world's estimated new supply will come from current projects and those set to complete by 2015, management believes it can capture a significant share of demand growth over the next few years. While much of its competition is still in the early stages of expansion/ coming up with new plans on expanding their output, POT has already 66% of its capital spending behind it; this is very important because labour costs are rising.
  • Demand for potash is expected to rise due to tight supplies in North America, Asia and Latin America, and management expects this trend to continue well into 2012. Management also expects strong demand from India as their inventories are now at critically low levels. Management expects shipments to India to be in the 4-5 million tonne ranges for 2012.
  • It has a strong competitive advantage as it holds the rights to the world's largest Potash Reserves. In 2010 it produced 16.1% of the global output of Potash.
  • Management expects ammonia shipments to hit a new record and surge to the 58-60 million tonne level in 2012.
  • Gross margins for nitrogen in the 4th quarter stood at $241 million, up from $153 million from the same period last year. For fiscal 2011, gross margins stood at $916 million, a new record.
  • Cash and cash equivalents stood at $430 million for fiscal 2011 versus $413 for the same period last year.
  • Net income has been dropping over the past few years; however operating cash flow has been steadily trending upwards.
  • It has a very low payout ratio of 11%.
  • A strong 3 year and 5 year total return of 71% and 162% respectively.
  • A strong 3 year dividend growth rate of 36%.
  • A low total debt to equity of 0.47.
  • A strong quarterly earnings growth rate of 41%.
  • A good interest coverage ratio of 11.
  • 100K invested in POT for 10 years would have grown to $1.24 million.

As we are going to list many key ratios in this article, investors would be best served if they got a handle on some of the following key ratios.

Levered free cash flow is the amount of cash available to stock holders after interest payments on debt are made. A company with a small amount of debt will only have to spend a modest amount of money on interest payments, which in turn means that there is more money to send to shareholders in the form of dividends and vice versa.

Operating cash flow is generally a better metric than earnings per share because a company can show positive net earnings and still not be able to properly service its debt; the cash flow is what pays the bills.

The payout ratio tells us what portion of the profit is being returned to investors. A payout ratio over 100% indicates that the company is paying out more money to shareholders, then they are making; this situation cannot last forever. In general if the company has a high operating cash flow and access to capital markets, they can keep this going on for a while. As companies usually only pay the portion of the debt that is coming due and not the whole debt, this technique/trick can technically be employed to maintain the dividend for sometime. If the payout ratio continues to increase, the situation warrants close monitoring as this cannot last forever; if your tolerance for risk is a low, look for similar companies with the same or higher yields, but with lower payout ratios. Individuals searching for other ideas might find this article to be of interest: 5 Solid, Long-Term Plays With Super Yields.

Debt to Equity Ratio is found by dividing the company's total amount of long-term debt (debts with interest rates that have a maturity longer than one year) by the total amount of equity. A debt to equity ratio of 0.5 tells us that the company is using 50 cents of liabilities in addition to each $1 dollar of shareholders equity in the business. There is no fixed ideal number as it depends on the industry the company is in. However, in general a ratio under 1 is acceptable and ideally it should be in the 0.5-0.6 ranges.

Current Ratio is obtained by dividing the current assets by current liabilities. This ratio allows you to see if the company can pay its current debts without potentially jeopardising their future earnings. Ideally the company should have a ratio of 1 or higher.

Interest coverage is usually calculated by dividing the earnings before interest and taxes for a period of 1 year by the interest expenses for the same time period. This ratio informs you of a company's ability to make its interest payments on its outstanding debt. Lower interest coverage ratios indicate that there is a larger debt burden on the company and vice versa. For example if a company has an interest ratio of 11.8, this means that it covers interest expenses 11.8 times with operating profits.

Quick ratio or acid -test is obtained by adding cash and cash equivalents plus marketable securities and accounts receivable dividing them by current liabilities. It is a measure of a company's ability to use its quick assets (assets that can be sold of immediately at close to book value) to pay off its current liabilities immediately. A company with a quick ratio of less than 1 cannot pay back its current liabilities. Additional key metrics are addressed in this article Cerner: Spectacular Growth In Healthcare IT.

Potash Corp. of Saskatchewan

Industry: Agricultural Chemicals

It has a free cash flow rate of $472.25M and a current ratio of 1.1 and an interest coverage ratio of 1.1

Performance

Total return for the past 3 years = 71.43%

Total return for the past 5 years = 162.29%

Total return for the past 12 months = -15.87%

Consecutive dividend increases = 1 years

Growth

Net income for the past three years

Net Income - 2011 = $981 million

Net Income - 2010 = $1806 million

Net Income - 2009 = $3081 million

Total cash flow from operating activities

2009 = $923.9 million

2010 = $923.9 million

2010 = $3 billion

EBITDA ($mil) 12/2011 = $N/A

EBITDA ($mil) 12/2010 = $2967

EBITDA ($mil) 12/2009 = $1503

Sales ($mil) 12/2011 = $8715

Sales ($mil) 12/2010 = $6539

Sales ($mil) 12/2009 = $3977

Dividend Sustainability

Total cash flow from operating activities

2009 = $923.9 million

2010 = $923.9 million

2010 = $3 billion

Payout Ratio = 11%

Other Key Important Ratios

Price to Sales = 4.66

Price to Book = 5.17

Price to Tangible Book = 5.52

Price to Cash Flow = 18.66

Price to Free Cash Flow = 36.6

Quick Ratio = 0.76

Current Ratio = 1.1

LT Debt to Equity = 0.5

Total Debt to Equity = 0.47

Interest Coverage = 11.18

Inventory Turnover = 7.07

Asset Turnover = 0.54

Dividend yield 5 year average = 0.38

Dividend rate = $ 0.56

Dividend growth rate 3 year avg = 36.67%

Dividend growth rate 5 year avg = 20.79

Consecutive dividend increases = 1 years

Paying dividends since = 1990

Total return last 3 years = 71.43%

Total return last 5 years = 162.29%

Related companies (Peer Group analysis)

Terra Nitrogen Co., L.P. (NYSE:TNH)

Industry: Agricultural Chemicals

It has a free cash flow rate of $$420 million and a current ratio of 6.94 and an interest coverage ratio of 9.8

Net income for the past three years

  1. Net Income - 2011 = $144 million
  2. Net Income - 2010 = $202 million
  3. Net Income - 2009 = $508 million

Total cash flow from operating activities

  1. 2008 = $292 million
  2. 2009 = $158 million
  3. 2010 = $259 million
  4. 2011= it stands at $376 and could top $508 million

Dividend yield 5 year average = 8.58

Dividend rate = $ 17.08

Dividend growth rate 5 year avgas = 4.72

Consecutive dividend increases = 1 years

Paying dividends since = 1997

Total return last 3 years = 106.6%

CVR Partners LP (NYSE:UAN)

Industry: Agricultural Crop Production

It has a free cash flow rate of $239.83M and a current ratio of 5.12 and an interest coverage ratio of 27.49

Net income

Net Income - 2011 = $91.2 million

Dividend yield 5 year average = N/A

Dividend rate = $ 2.09

Dividend growth rate 3 year avg = 0%

Dividend growth rate 5 year avg = N/A

Consecutive dividend increases = 0 years

Paying dividends since = 2011

Total return last 3 years = N/A

Total return last 5 years = N/A

Sociedad Quimica y Minera de C (NYSE:SQM)

Industry : Agricultural Chemicals

It has a free cash flow rate of $24.74M and a current ratio of 3.02 and an interest coverage ratio of 7.64.

Net income for the past three years

Net Income - 2011 = $338 million

Net Income - 2010 = $382 million

Net Income - 2009 = $N/A million

Total cash flow from operating activities

2008 = $457.32 million

2009 = $371.36 million

2010 = $618.53 million

Dividend yield 5 year average = 1.59

Dividend rate = $ 0.76

Dividend growth rate 3 year avg = 23.2%

Dividend growth rate 5 year avg = 24.51

Consecutive dividend increases = 1 years

Paying dividends since = 1994

Total return last 3 years = 112.36%

Total return last 5 years = 334.77%

Mosaic Co (The) (NYSE:MOS)

Industry : Agricultural Chemicals

It has a free cash flow rate of $464.38M and a current ratio of 3.03 and an interest coverage ratio 160.

Net income for the past three years

Net Income - 2011 = $2350 million

Net Income - 2010 = $827 million

Net Income - 2009 = $2515 million

Total cash flow from operating activities

2009 = $1.25 billion

2010 = $1.36 billion

2011 = $2.43 billion

Dividend yield 5 year average = 0.26

Dividend rate = $ 0.20

Dividend growth rate 3 year avg = 0%

Dividend growth rate 5 year avg = 0

Consecutive dividend increases = 0 years

Paying dividends since = 2008

Total return last 3 years = 42.76%

Total return last 5 years = 131.9%

Conclusion

While POT is a good long term play, we feel that TNH is an even better play in terms of its yield, divided growth rate, ROE, ROI and in terms of how much more 100K would have grown to if invested in TNH for 10 years as opposed to POT. We like TNH for the following reasons.

  1. 5 year dividend average of 8%.
  2. 5 year dividend growth rate of 83%.
  3. Net income and operating cash flow have been trending upwards for the past 3 years and they both experienced huge gains in 2011.
  4. A strong quarterly earnings growth rate of 180%.
  5. A strong quarterly revenue growth rate of 49%.
  6. A great ROE of 197% and ROA of 100%.
  7. A very good quick ratio of 6.89.
  8. An excellent current ratio of 7.7.
  9. It has no debt at all.
  10. A pretty inventory turnover of 11.60.
  11. A strong interest coverage ratio of 9.8.
  12. A great current ratio of 7.
  13. A good free cash flow of $430 million.
  14. 100k invested in TNH would have grown to a spectacular $4.3 million.

Investors should, however, wait for a strong pullback before committing large sums of money to this market. The markets are extremely overbought and jumping into the markets at these lofty levels would not be a wise long term decision.

EPS, EPS surprise charts obtained from zacks.com. Earnings estimates and growth rate charts obtained from dailyfinance.com.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: This list of stocks is meant to serve as a starting point. Please do not treat this as a buying list. It is imperative that you do your due diligence and then determine if any of the above plays meet with your risk tolerance levels. The Latin maxim caveat emptor applies-let the buyer beware.

Source: Is Potash Corp. Of Saskatchewan A Good Long-Term Dividend Investment?