Step by step, shares of Potash Corp. (POT) have almost returned to levels seen prior to the announcement of the breakup between Uralkali and Belaruskali. The same is true for Mosaic (MOS 0.26%), while another Canpotex member, Agrium (NYSE: AGU), is already trading higher. Potash Corp. just reported solid first quarter results, beating analysts' estimates. However, will this be enough to push its shares higher?
Potash prices may have seen the worst
The first quarter marked the return of potash demand for Potash Corp., as sales rose to 2.3 million tons, up from 1.7 million tons in the fourth quarter of 2013 and 1.5 million tons in the third quarter of 2013. However, the average potash realized priced dipped even further. Potash Corp. sold its potash for an average $250 per ton in the first quarter, which is not an encouraging sign prior to Mosaic's and Agrium's first-quarter reports.
On the other hand, nitrogen and phosphate realized prices increased, although this increase was relatively small. During the earnings call, Potash Corp. CEO Bill Doyle concluded that after talks with Asian customers he believed a price floor had been reached. I share this view, as currently there don't appear to be any catalysts that could drive potash prices further down.
The deteriorating effect of the Uralkali and Belaruskali breakup is already in the price of potash. What's more, there's always a possibility that Uralkali and Belaruskali return to some form of partnership in the future, which will push prices higher. Last year's results were disappointing for Uralkali. Net revenue dropped by 20% while net profit dropped 58%. Such performance could not please shareholders, so there could be strong incentive for Uralkali to return to the previous status quo.
Two supportive factors still in play
In my view, two significant factors have supported Potash Corp. shares during and after the potash price turmoil. The first is the company's dividend, and the second is its share buyback program. Both factors are still in play. While Potash Corp.'s dividend yield has fallen following the rise in its share price, it is still an impressive 3.91%. In comparison, Mosaic yields 2.00% while Agrium yields 3.13%.
The company continues to execute on its share repurchase program. Potash Corp. has bought back nearly 12 million shares at an average price of $34 per share in the first quarter. The company stated that it had completed approximately 60% of the buyback program and expected to complete it by August.
It is doubtful that Potash Corp. will announce a new share repurchase program after August, as its cash flows remain pressured by low fertilizer prices. However, current performance is enough to sustain the dividend.
Bottom line
Potash Corp. is delivering solid results despite soft fertilizer prices. Its shares have support from the strong dividend yield and the share buyback program. There's also a possibility that Uralkali will make moves toward the lost status quo in the second half of the year, as the company's results are disappointing following the breakup with Belaruskali. This will lead to higher potash prices for all producers. That said, Potash Corp. needs more improvements on the price front to demonstrate significant upside.
