Potash Corp. just released its second-quarter earnings report, where it stated that it would cut the dividend by 60%. The quarterly dividend is cut from $0.25 per share to $0.10 per share. At current premarket prices ($16.75), Potash Corp. yields 2.39% and leaves the league of income-oriented stocks.
This decision was hardly a surprise for those who followed the situation closely. Fertilizer markets remained under pressure in the second quarter. Pricing numbers are disappointing. Realized price for potash fell from $178 per ton in the first quarter to $154 per ton in the second quarter. Nitrogen prices were flat at $244 per ton.
Phosphate saw additional downside from $499 per ton to $485 per ton. Nitrogen and phosphate sales decreased compared to the first quarter, while potash sales increased from 1.8 million tons in the first quarter to 2.1 million tons in the second quarter. On the positive side, production costs decreased and helped mitigate the impact from low prices.
A look at Potash Corp.'s new guidance explains why the dividend cut was inevitable:
Previously, Potash Corp. guided for full-year earnings of $0.60 - $0.80 per share. This number was already lower than the annual dividend at the time, which stood at $1.00, but left hopes that the dividend might be covered if things change for the better in the second half of the year.
It is now obvious that Potash Corp. does not expect improvements in the second half of the year, and guides for just $0.05 - $0.10 earnings in the third quarter.
The new dividend rate is based on the lower end of the current earnings guidance. Just like before, Potash Corp. did not want to leave itself a little room for maneuver in case things deteriorate even further.
The bottom in the potash market is, perhaps, in, but an annual dividend of $0.30 per share instead of $0.40 per share would have almost guaranteed that no further cuts would follow.
Nevertheless, I'm pleased that the company finally made the dividend decision that reflected reality rather than hopes.
In the earnings release, Potash Corp. stated that it believed in better conditions for the remainder of 2016, although its own guidance did not reflect this stance. The same narrative was present in the first-quarter earnings release, so investors should take these statements with a grain of salt.
Interestingly, Potash Corp. expects a strong year 2017 in terms of potash demand and projects world demand of 61 million ton - 64 million ton, up from this year's estimate of 59 million ton - 61 million ton.
If these expectations materialize, potash market will easily swallow the new supply from the K+S Legacy mine, which was considered as an additional threat to an already weak market.
So, what to do now when Potash Corp. finally aligned its dividend with earnings?
Current earnings guidance suggest that the company will be trading at around 25 - 30 forward P/E, if we expect that the next year will be better and full-year 2017 earnings rise above this year's numbers.
This is probably too much even for a company of Potash Corp.'s caliber. However, the downside may not occur as many investors have been waiting for a pullback on dividend cut to initiate a long position.
Potash Corp. is currently trading in a wide range, and, in my view, the worst thing to do with stocks is to buy them in the middle of the range. Buys at the bottom of the range (value play) and on the breakout of the range (momentum building) make more sense to me.
Judging by the premarket price action, no significant pullback occurred on the news. Nevertheless, I believe that patience will pay off and I will continue to watch Potash Corp. shares in order to buy them on real weakness.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in POT over 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.