Follow the dividend investment decisions of a person who has no background in financial investment and wishes to take control of their financial future.

Right Idea Incomplete Analysis (POT) - 17 Aug 2016 12:19

Tags:

Read an article on Seeking Alpha warning of another dividend cut at Potash Corp. (POT) if market prices for potash continues to deteriorate.

http://seekingalpha.com/article/3999781-potash-corporation-another-dividend-cut-likely-market-continues-deteriorate

I thought this article was way too passive on its warning and the balance sheet is not quite as strong as the author states because his analysis was incomplete by not including an analysis on the liquidity of POT. The author points out that after two dividend cuts in 2016, POT has a dividend payout ratio of 100% that could be sustainable as long as market prices for potash do not deteriorate further and also thanks to a decent balance sheet with a debt to equity ratio of only 0.5.

I completely disagree and believe the risks in investing in POT are even higher regardless if potash prices remain stable. First POT has been burning through their available cash reserves which have shrunk from $628M at the end of 2013 to $91M at the end of 2015. Luckily slicing the dividend has reduced negative slide somewhat as the balance sits at $143M but with a 100% payout ratio how long will that last?

The second issue I have is disputing the debt to equity ratio. Most of the assets used in this calculation are $13.2B in fixed assets of property, plants, and equipment. If we remove this and look at it from a liquidity perspective the ratio jumps dramatically to 1.89 or more than three times the authors 0.5 ratio. And all of those assets (even if not in use) become a liability as they have to be maintained, upgraded or replaced and will appear as Capital Expenditures on the Cash Flow Statement.

If I was a shareholder what really would have pissed me off is the misuse of cash to buyback stock over the years. How much better would the company have been if they used the cash to retire debt? I would have no faith in a CEO or Board that places improving "Per Share" or "Share Price" amounts over improving the company itself! - Comments: 0


Unless otherwise stated, the content of this page is licensed under Creative Commons Attribution-ShareAlike 3.0 License