Shares of PotashCorp (POT) have been under pressure since the Russian potash producer Uralkali broke its ties with Belaruskali and decided to flood the market with cheap potash. It's already been half a year since Uralkali disrupted the marketplace, and there are signs that things aren't that bad after all for PotashCorp. But first, let's start with negative developments.
Pricing pressures are severe and are likely to remain in the short term
PotashCorp's fourth quarter report revealed that its averaged realized potash price continued to decline. The price fell from an already low $307 per ton to $280 per ton. Such developments are unwelcome news for shareholders of two other Canpotex members, Mosaic (MOS 0.59%) and Agrium (NYSE: AGU).
Uralkali's recent contract with Chinese customers stood at $305 per ton for the first half of this year. Hopefully for the potash industry, this will serve as a price floor. However, no one can be sure about that until the first quarter's realized price numbers are released.
Until then, news from China and India will provide a source of knowledge on the fundamental developments. PotashCorp stated that Chinese potash consumption in recent years increased at a slower pace than in previous years. As a result, domestic capacity gains were on pace with the rising needs, thus reducing demand for imports.
The company sees opportunity in the fact that as much as 11% of the Chinese population is undernourished according to the country's own statistics. The future growth of fertilizer demand is inevitable. However, this is a long-term story, and it is unlikely to impact prices within a one-year time horizon.
Sales growth and cost containment efforts
While the public's focus is on the potash price drop, one should notice that PotashCorp actually makes money on each ton of potash sold. Yes, the margins are shrinking, but the company still had a $1.6 billion gross margin in its potash segment in 2013.
PotashCorp plans to grow sales to between 8.2 million and 8.6 million tons in the current year. What's more, the company anticipates that cash production cost per ton of potash will be $15-$20 lower than in 2013. Even with these efforts its gross margin is expected to shrink to $1 billion–$1.3 billion in the current year. However, it looks like such developments are already reflected in the share price, as the stock trades at just 15 times its future earnings.
Good dividend yield and share repurchase program
Despite the market turbulence, Potash Corp didn't touch its dividend, which yields a hefty 4.5%. From an income point of view, the company looks better than Agrium and Mosaic, which yield 3.4% and 2.2% respectively. With a payout ratio of 46%, the dividend looks sustainable if we assume another price shock won't take potash prices to $200 per ton. However, I can't think of developments that could drive the price to such lows.
PotashCorp also has a $2 billion share repurchase authorization. During the Q&A session of the earnings call, the company stated that it intends to push ahead with share purchases as soon as it can as the shares look cheap. Last quarter, PotashCorp spent $245 million on share repurchases. Given the company's comments, this number could be increased, providing more support for the stock.
Bottom line
On the one hand, we have continuing pressure on fertilizer prices. On the other hand, PotashCorp is likely to make progress on the cost front and pays a good dividend. I believe that long-term fundamentals are positive for fertilizer companies. At some point of time in the future, this will be reflected in fertilizer prices. Until then, a good, sustainable dividend pays you to wait.
