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Is Potash Corporation’s Dividend Sustainable?

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High payout ratio

In 3Q15, Potash Corporation (POT) paid cash dividends of $313 million or $0.38 per share. This translated into a dividend payout ratio of 112.5%. In other words, the company distributed more than what it earned in 3Q15. For the first nine months, the company’s payout ratio was 84%, which is still considered high.

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Concerning free cash flows

One of the ways to arrive at free cash flows is by deducting capital expenditures from the company’s operating cash flows. The company can use the remaining cash to pay dividends, repurchase shares, or retain it on the balance sheet for later reinvestment in the business.

This makes it important to look at the company’s free cash flow trend as well. During the first nine months of 2015, Potash Corporation’s free cash flows declined to $913 million from $1,175 million in the corresponding period a year ago in 2014.

On the other hand, dividends increased from $875 million to $899 million over the same nine-month period. So the company couldn’t repurchase shares over the same period because it didn’t have enough left.

Potash Corporation (POT) along with Mosaic (MOS), CF Industries Holdings (CF), and Agrium (AGU) form about 14% of the VanEck Vectors Agribusiness ETF (MOO).

The next 12 months

Wall Street analysts are estimating Potash Corporation’s free cash flows to fall in the next 12 months to $923 million compared to $1,214 million in the trailing 12 months.

Assuming that the company doesn’t repurchase any shares in the next four quarters and maintains its current dividend levels, the company may not be able to fund its dividend distribution of about $1,298 million from free cash flows alone.

So how will the company fund its dividend obligation? We’ll look at that in the next part of this series.

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