Potash Cuts Dividend as Earnings Drop With Fertilizer Prices

  • Payout reduced by 34% as potash, nitrogen prices decline
  • Full-year earnings forecast trails analysts' estimates

Potash Corp. of Saskatchewan Inc., the world’s largest fertilizer producer by market value, cut its quarterly dividend for the first time since a 1989 initial public offering as it forecast lower-than-expected earnings amid lower prices for crop nutrients.

Quarterly payments to shareholders will drop to 25 cents a share from 38 cents, the Saskatoon, Saskatchewan-based company said Thursday in a statement. It also reported fourth-quarter net income fell to 24 cents a share from 49 cents a year earlier, missing the 30-cent average of 20 estimates compiled by Bloomberg. Sales dropped 29 percent to $1.35 billion, trailing the $1.39 billion average projection.

Its earnings forecasts for both the current quarter and full year also disappointed. The shares declined 1.4 percent to $14.98 at 9:33 a.m. in New York.

Some analysts had recently questioned the sustainability of the dividend, which yields about 10 percent, following declines in the price of potash and nitrogen-based fertilizer, which Potash Corp. also produces. Last week, Chief Executive Officer Jochen Tilk signaled his intent to adjust to the challenging market conditions by announcing the closing of the Picadilly mine in New Brunswick, one of the company’s newest operations.

Credit Rating

"The dividend was set during a period of cyclical strength and a higher level of earnings and industry structure conditions that do not resemble today’s business landscape," Jeffrey Zekauskas, a New York-based analyst at JPMorgan Chase & Co. who has a hold rating on the stock, said in a Jan. 25 note.

The dividend cut will help preserve the company’s investment-grade credit rating, Tilk said in the statement.

"We believe this level – representing a payout ratio of close to 100 percent of 2016 earnings – remains highly competitive and balances the interests of our many stakeholders, including equity and debtholders," he said

Full-year earnings will be 90 cents to $1.20 per share, Potash Corp. said Thursday. The forecast includes $35 million in first-quarter costs related to closing Picadilly. The average of analysts’ estimates was for profit of $1.32 a share.

Potash prices on the U.S. spot market have tumbled 32 percent over the 12 months to an eight-year low as increased production collided with low corn and soybean prices that have curbed farmer spending.

Rising Supply

Spot prices for urea, a nitrogen-based fertilizer, have declined following a drop in the price of natural gas, a raw material used to make the crop nutrient. Potash Corp. said its realized price for nitrogen-based fertilizer slid 29 percent in the fourth quarter, while potash prices declined 16 percent.

"Increasing low-cost domestic supply over the next several years will continue to lower the North American urea price floor," Paul A. Massoud, a Washington-based analyst at Stifel Nicolaus & Co. who recommends buying the shares, said Jan. 26 in a note.

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