Mos Miners
Source: Mosaic.

The last thing dividend investors like to see is a company whose earnings aren't sufficient to cover the amount being paid out to shareholders. In general, the best sign of dividend health is a business that can generate enough net income to finance its dividend payments and leave enough spare cash for strategic acquisitions, stock buybacks, or other capital allocations that benefit shareholders. When net income falls, as has happened lately to fertilizer company Mosaic (NYSE:MOS) , investors worry that a dividend cut might follow.

The agricultural sector has been relatively strong for the past decade or so, and high crop prices gave farmers enough money to boost their spending on fertilizer and other yield-enhancing resources. Yet while Mosaic initially participated fully in the fertilizer boom, plunging natural gas prices made nitrogen-based fertilizers look more attractive than phosphate and potash. When a major potash cartel in Russia and Belarus broke apart, potash prices crashed, and Mosaic and rival PotashCorp (NYSE:POT) saw their shares fall in concert. Since then, revenue has fallen sharply, and Mosaic's profits have been crushed. Given all that, let's do a dividend payout ratio analysis to see if Mosaic's current dividend yield is sustainable.

A look at Mosaic

Current Yield

2.3%

Current Annualized Dividend Per Share

$1.00

Earnings Per Share, Trailing 12 Months

$0.54

Earnings Payout Ratio

185%

Source: Yahoo! Finance.

Will Mosaic's dividend get cut?
When you look at just how far Mosaic's profits have fallen recently, it's reasonable for dividend investors to fear for the company's ability to keep making dividend payments. As recently as 2012, Mosaic's annual earnings were more than $4 per share, making the company's current payout look relatively stingy. Yet the speed with which Mosaic's net income fell shows how quickly what seems to be a safe dividend can turn into something that looks dangerously generous.

Mos Plant

Source: Mosaic.

Mosaic's fall from grace came from multiple sources. On one hand, fertilizer giants Uralkali and Belaruskali last year broke up their Belarusian Potash joint venture, and that led to a major loss of control of prices in the industry. As fertilizer prices plunged, Mosaic and its peers became less profitable. At the same time, crop prices also became more volatile, giving up ground and making it tougher for farmers to afford the same expenditures on crop-yield enhancing products like Mosaic's fertilizers.

In the face of these challenges, Mosaic has made a number of efforts to shore up its finances. A deal with CF Industries (NYSE:CF) gave Mosaic greater exposure to the phosphates business, further diversifying its product mix beyond potash. In addition, the purchase of South American fertilizer facilities from Archer Daniels Midland (NYSE:ADM) gave Mosaic greater geographical diversity; with ADM committing to a supply contract, Mosaic has a guaranteed source of revenue no matter what happens in emerging markets.

Even as some see brightening prospects for fertilizer stocks, Mosaic will face competition. In addition to PotashCorp, BHP Billiton (NYSE:BHP) could start developing its Jansen potash mine in Canada, which would potentially put further pressure on Mosaic's potash business.

Mos Phosphate
Source: Mosaic.

Will Mosaic's earnings recover?
The long-term trends that have driven rising interest in fertilizer since the turn of the millennium show no signs of reversing themselves, with global population continuing to increase and the need for increased crop efficiency only growing. Based largely on those trends, and to some extent on the recovery in fertilizer prices more recently, most analysts expect Mosaic's earnings to return to the $4 to $5 per share range by 2016 and to stay there for several years. As long as that recovery is timely, concerns about a $1 per share annual dividend will look silly in hindsight.

Nevertheless, Mosaic investors must keep a close eye on market conditions for the various fertilizer products that the company makes. With the potential for further disruptions if farm-commodity prices become unfavorable, Mosaic needs its customers to have the financial strength to buy its fertilizers in the years to come -- or else paying even a 2.3% dividend yield might be too ambitious.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of CF Industries Holdings and PotashCorp. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.