Is There Danger Lurking in

Potash Corp.’s Dividend?

Potash Corp. raised its quarterly dividend by 9% in January, putting its annual dividend at $1.52 per share. That’s a 525% jump since 2011.

Latest dividend boost

Solid track record

Data source: Company financials. Chart by author

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Dividend yield

Thanks to regular dividend increases and the recent drop in its stock price, Potash Corp.’s dividend yield is the highest in the industry today.

At record highs

Dividend payout

Potash Corp. also has the highest dividend payout ratio (percentage of profit paid out as dividend) among peers.

Highest in the industry

The question is:

Can Potash Corp. continue to reward shareholders with higher dividends?

Let’s find out

A quick look at Potash Corp’s debt position, cash flows, and dividend payment history can give us an answer.

Debt

Potash Corp’s long-term debt has declined substantially since 2011.

Deleveraging

Cash flows

Meanwhile, the company’s free cash flow is growing steadily.

Steady growth

Lower capex = Higher FCF

That’s because Potash Corp.’s capital expenditures have been on the decline as it nears completion of a multi-year expansion program costing nearly $8.4 billion.

Declining capex

Source: Potash Corp. 2014 Annual Integrated Report

No mean feat

It’s also worth noting that Potash Corp. generated nearly as much in free cash flow as net income over the past couple of years.

A green flag

A green flag

That’s an encouraging sign since a company pays dividends out of its free cash flow.

Dividend history

Potash Corp.’s strong dividend history further strengthens its case.

Potash Corp. has:

paid a dividend every quarter since 1990

grown its annual dividend more than 11 times since 2010

increased its payout substantially in recent years

To summarize: Potash Corp.

Is cash flow positiveIs deleveraging while growing its cash flowsExpects significant FCF growth in coming years as capital spending tapers

Foolish takeaway: No risk

A high payout ratio may leave little room for growth, but strong potential cash flows, coupled with reducing debt, should ensure that Potash Corp. can reward its shareholders with handsome dividends going forward even in weak industry conditions.

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