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Is There Danger Lurking in Potash Corp.’s Dividend?

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Potash Corp.'s dividend yield hits record highs: Value trap or sustainable?

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Is There Danger Lurking in Potash Corp.’s Dividend?

  1. 1. Is There Danger Lurking in Potash Corp.’s Dividend?
  2. 2. Potash Corp. raised its quarterly dividend by 9% in January, putting its annual dividend at $1.52 per share. That’s a 525% jump since 2011. Latest dividend boost
  3. 3. Solid track record Data source: Company financials. Chart by author 0 0.2 0.4 0.6 0.8 1 1.2 1.4 1.6 1.8 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Annualdividendpersharein$
  4. 4. 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.
  5. 5. At record highs
  6. 6. Dividend payout Potash Corp. also has the highest dividend payout ratio (percentage of profit paid out as dividend) among peers.
  7. 7. Highest in the industry
  8. 8. The question is: Can Potash Corp. continue to reward shareholders with higher dividends?
  9. 9. Let’s find out A quick look at Potash Corp’s debt position, cash flows, and dividend payment history can give us an answer.
  10. 10. Debt Potash Corp’s long-term debt has declined substantially since 2011.
  11. 11. Deleveraging
  12. 12. Cash flows Meanwhile, the company’s free cash flow is growing steadily.
  13. 13. Steady growth
  14. 14. 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.
  15. 15. Declining capex Source: Potash Corp. 2014 Annual Integrated Report
  16. 16. 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.
  17. 17. A green flag
  18. 18. A green flag That’s an encouraging sign since a company pays dividends out of its free cash flow.
  19. 19. Dividend history Potash Corp.’s strong dividend history further strengthens its case.
  20. 20. 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
  21. 21. To summarize: Potash Corp. Is cash flow positive Is deleveraging while growing its cash flows Expects significant FCF growth in coming years as capital spending tapers
  22. 22. 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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