Why potash companies may be great for value investors (Part 1 of 11)
Market analysis report
Potash Corp. (POT) recently released several market-fundamental reports and changes to its operating production. The company is one of the few that tries to make its industry more transparent to investors, which helps investors understand Potash’s business and the attractiveness of investing in the company and industry.
Higher dividend yield than the S&P 500
Of course, with dividend yield of 4.24% compared to the S&P 500′s 1.87%, what’s not to like as a possible dividend investment? Mosaic Co. (MOS) also has a dividend yield of 2.13%, and share prices could be supported with share buyback plans.
Lower leverage compared to the S&P 500
We’ve seen the market report a solid return in 2013, fueled by easy money and a more stabilized global economy. While economic growth is likely to remain strong in 2014, the U.S. market has risen quite substantially this year. And when most people are bullish, it could result in short-term corrections. Long-term interest rates have been rising as the central bank starts scaling back its quantitative easing program. This could negatively impact companies that have a substantial amount of debt that needs to be rolled over or companies that are highly leveraged, because it increases the cost of capital. The S&P 500 companies’ average debt-to-equity ratio (a measure of debt leverage) is around 1.37x. Fertilizer companies like POT, Mosaic Co. (MOS), Agrium Inc. (AGU), and CF Industries Holdings Inc. (CF) have debt-to-equity of below 0.63 times, making them less sensitive to changes in interest rates.
Lower beta than the market
These companies also have low betas (ones other than AGU). Beta is an approximation of how much the share price would likely increase and decrease based on a 1% change in the S&P 500′s performance. This is done by comparing past performance of the stock to the S&P 500, according to CSIMarket’s data. A lower-than-1.0 beta means the stock is expected to fall less when the market declines—assuming no other fundamental factors are at work. So if the market is going to fall, fertilizer companies could even outperform. Note that beta is backward-looking, and is subject to use of different timeframes.
But how about the industry fundamentals? This series will focus on some of the latest key indicators within those reports as well as those in Uralkali’s recent presentations.
Browse this series on Market Realist:
- Part 2 - 3 key points that show that corn prices have already bottomed
- Part 3 - Improved margins could support ethanol production despite the EPA
- Part 4 - Why a new study suggests more potash use may be a longterm benefit
- Basic Materials Industry
- Potash Corp