Dividend Yield & Wide Moat with Potash Corp.

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Jul 20, 2015

Potash Corp. of Saskatchewan (USA) (POT, Financial) provides a wide moat, discounted share price, and a solid dividend yield for long term investors.

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Potash is a fertilizer company with three business segments: potash, nitrogen and phosphate. It operates potash mines in Saskatchewan and New Brunswick and has nitrogen facilities in Georgia, Louisiana, Ohio and Trinidad. It has phosphate mines and mineral processing plant complexes in Florida and North Carolina.

PotashCorp is the world’s largest producer of potash fertilizer by capacity and is profitable while being a low cost leader. This gives the company a solid economic moat within the industry.

Fertilizer is important, we can all agree on that. Potash is important for agriculture because it improves water retention, yield, nutrient value, taste, color, texture and disease resistance of food crops. It has wide applications from fruit and vegetables, rice, wheat and other grains, sugar, corn, soybeans, palm oil and cotton, all of which benefit from the nutrient’s quality enhancing properties.

Some analysts have pointed to concerns over the company’s recent deal to acquire Germany’s K+S AG for $8 billion, citing that major miner BHP Billiton could pose a threat to the Potash cartel. While it may be true that BHP has exploration rights to over 14,500 square kilometers of highly prospective ground in the Saskatchewan potash basin, they aren’t going to market yet. Until the dollars start rolling in, Potash is still the leader.

From a business standpoint, the company’s mines will be able to produce Potash for the next 50 to 75 years. Potash can currently produce 10.9 million tonnes per year and have increased output from 7.72 to 9.0 in the last 4 years. Of course, the cost of potash has fallen from its 2011 highs in the 400’s down to $307 per tonne. Yet, if they can get to peak production and see a rise in prices, investors could be looking at a 40% increase in sales just within this segment in the next 3 years.

From a financial standpoint, the company is rock solid, generating $1.57 billion in net income on $6.5 billion in sales at 33% operating margin. Management has steadily increased both gross margins and book value while keeping CapEx spending below 75% of net and total debt levels under 4x annual income. This, coupled with the company’s economic moat and commitment to buying back shares, bodes well for investors in the long term.

In 2005

  • Total Sales: $3.8 billion
  • Net Income: $545 million
  • Book Value: $2.49
  • Div Yield: $0.07

In 2014

  • Total Sales: $7.1 billion
  • Net Income: $1.5 billion
  • Book Value: $10.55
  • Div Yield: $1.40

With the stock currently under $29 per share, the future looks certain for the company. Is it going to be a high flying technology unicorn going from $1 billion to $50 billion? NO. It will however pay out 5% of its earnings and continue to increase both earnings and dividends over time. I believe this will lead to a share price in the $60 to $80 range at some point in the next 3 to 5 years.