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Where has PotashCorp’s cash gone?

Jose de la Puente, Jr Agriculture Associate

PotashCorp: an investor's guide to the fertilizer giant (Part 8 of 9)

(Continued from Part 7)

Some companies, like Mosaic (MOS), have massive amounts of cash, PotashCorp, on the other side, does not. This particularity has been constant over the past 5 years. The difference between PotashCorp and Mosaic, is that PotashCorp decided to put its cash to work. While having more cash allows a company to reduce risk, having too much might diminish potential growth rates.

Heavy Capital Expenditure expected to decrease significantly

Over the past years, PotashCorp has been investing heavily on increasing its production facilities. Recently, the company completed a 10-year expansion program, which constituted almost half of cash expenses, and announced that it will cut on capital expenditure. With an oversupplied industry and low operating rates, it makes sense to take this course of action.

With lower expenditure in new projects, the company will be able to accumulate more cash by spending less. Sustaining current capital still costs the company between $700 million and $800 million a year. Peer Intrepid Potash (IPI), is in a similar stage. With strong past investments, both companies will cease capacity expansion to generate more cash.

Dividends have been dramatically increasing

PotashCorp has one of the highest dividend yields in the industry, surpassing the average of the S&P 500 and the iShares Dividend ETF (DVY). Dividend yield is the amount investors get from each dollar invested in the firm. Almost one third of all cash expenses during 2013 constituted of dividends. A strong dividend is beneficial for an investor when the industry is not performing well in general because it is a secure return on an investment.

Where will cash go now? – Share repurchase

PotashCorp’s dividend payouts is expected to remain high, however capital expenditure, the largest cash expense, is expected to reach minimal levels in the near future. With no investment plans ahead, PotashCorp will start a $2 billion NCIB repurchase program. NCIB (Normal-Course Issuer Bid), is a Canadian term for a company repurchasing its own stock in order to cancel it. This program allows a company to repurchase between 5% and 10% of its shares; PotashCorp is located in lower limit. This was announced on July 2013 and is expected to be completed throughout 2014.

Continue to Part 9

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