No, that is not a typo. PotashCorp (NYSE:POT) has grown its quarterly dividend from just over $0.03 per share in January 2011 to $0.28 today. You may think it is unsustainable, but consider that it weighs in at a reasonable 37% payout ratio for the midpoint of 2013 earnings guidance. The company is also poised to benefit from recent capital investments and regional growth in fertilizer demand. Surely, competitors will benefit from improving market conditions as well. To determine what sets PotashCorp and its dividend apart from the crowd investors will need to take a deeper look.

The crowd
A quick snapshot of key players in the fertilizer industry shows that PotashCorp maintains the highest dividend yield and payout ratio.


Annual Distribution, Yield

Payout Ratio (TTM)


$1.12, 2.67%


Agrium (NYSE:AGU)

$1.00, 0.87%


Mosaic (NYSE:MOS)

$1.00, 1.63%


CF Industries (NYSE:CF)

$1.20, 0.7%


Source: SEC filings; TTM = trailing 12 months.

These numbers tell us very little about PotashCorp or the industry. After looking into the big three nutrient sources – potassium, phosphorous, and nitrogen – it quickly becomes obvious that not all fertilizer companies are created equally.

PotashCorp is the largest of the 12 major potassium producers with 22 million metric tons of potash capacity. The company's mines boasted 20% of global capacity in 2011, which is expected to grow to 23% by 2016. A targeted reinvestment campaign to improve existing facilities has paid off tremendously as production increased 33% in 2012 to 12 million metric tons – nearly double 2005 capacity. Better yet, PotashCorp expects to produce an additional 5 million metric tons by 2015.

By comparison, Agrium had a mere 2 million metric tons of capacity in 2011. Mosaic, however, embarked on an ambitious $6 billion potash expansion project in 2008 that will increase capacity to 11.6 million metric tons by 2015 and 15 million metric tons by 2021. Both figures remain a distant second to PotashCorp, but the expansion underscores the surging demand for fertilizer products.

Won't all of this expansion push costs up and limit profits for shareholders? Consider that roughly 5 million metric tons of PotashCorp's production growth by 2016 will come from brownfield sites, or mines that are already in operation. Mosaic will see brownfield growth of 3 million metric tons.  

Enhancing capabilities of brownfield sites has several significant advantages of investing in greenfield, or new, mines. According to PotashCorp, a greenfield project in Saskatchewan would cost nearly $3,250 per metric ton, compared to $1,000 or less for a brownfield project.   

Aside from timely and strategic infrastructure investments PotashCorp has also invested in smaller producers in Spain, Israel, Jordan, and Chile. Income from these investments totaled $1.75 billion between 2008 and 2011, with $650 million coming from dividend payments.  

PotashCorp offers an annual phosphate rock capacity of 9.6 million metric tons, far behind Mosaic's 16 million metric tons. CF industries, which has increasingly focused on its nitrogen business, and Agrium add roughly 3 million metric tons of annual capacity to the mix.  

Mosaic may be the leader in terms of volume, but PotashCorp's phosphate diversification is second to none. The company offers products to four segments: liquid fertilizer, solid fertilizer, feed, and industrial. Mosaic serves only the solid fertilizer and feed markets, albeit in much larger quantities. The key takeaway here is that feed and industrial phosphate prices don't encounter the wild seasonal fluctuations of phosphate fertilizer. For example, phosphate fertilizer prices soared to $900 per metric ton in 2008 before dropping 67% to $300 in 2009. Industrial phosphate fell from $700 to $600 on the same basis.   

Demand for nitrogen fertilizers has risen sharply in recent years, but domestic production has been slow to catch up. In 2011, an estimated 54% (10.8 million metric tons) of nitrogen used in the country's heartland was imported. More than 20% of imports can be chalked up to PotashCorp's Trinidad ammonia facilities. In total, the company produced 3.5 million metric tons of ammonia in 2012, which will grow 500,000 metric tons this year.  

Unfortunately for PotashCorp, location is everything in the nitrogen business. A Midwest producer's costs can be as low as $150 per metric ton, while the Trinidad facilities hover closer to $400. Geographic advantages have greatly enhanced the margins of CF Industries' majority-owned subsidiary Terra Nitrogen, which produced nearly 13 million metric tons of nitrogen in 2011. The two companies will continue to lead worldwide nitrogen production for the foreseeable future.  

Realizing the high barriers in transporting nitrogen to farmers in the Midwest, PotashCorp sells 85% of its ammonia to industrial customers – mostly in the Gulf. The rest makes its way through pipelines to customers further inland.

Foolish bottom line
The entire industry has undertaken massive expansion projects in the last decade to respond to the increasing demand for fertilizer products. Perhaps no other company embodies the industry's strategic investment strategy better than PotashCorp, whose $2 billion in investments since 1998 have a cumulative market value of $9.2 billion today.

Source: PotashCorp Corp

Investors should see tremendous growth over the next few years as the company's latest round of investments winds down. A smaller tab for capital expenditures will free up over $1.5 billion in cash flow – before accounting for production increases – by 2015. In my opinion, market demand and lower expenses ensure an improving cash flow and a safe dividend for the foreseeable future. Do you agree with me? Let me know in the comments section below.