How Potash Corp. became a 'dividend aristocrat' for less than a week

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Congratulations were in order for Potash Corp. of Saskatchewan getting named to the S&P/TSX Canadian Dividend Aristocrats Index in recognition of a track record of increasing its dividend payouts.

Note the past tense, "were." Standard & Poor's Index Services division named Potash one of 17 new members of the index on Jan. 22. Less than a week later, Potash Corp. announced a woeful 2016 outlook and cut its dividend. In a rather unusual development, the S&P Index Committee discussed the matter and dropped Potash Corp. from the index before it could even be formally added on Monday (Feb. 1), the day the changes went into effect.

As a result, Potash Corp. will not be a holding of the iShares S&P/TSX Canadian Dividend Aristocrats Index ETF, the fund that tracks the index and has more than $800-million in assets, according to Morningstar.

To be a Canadian aristocrat, a company must have a five-year period of increasing dividends, with no more than one year where the payout holds steady. The dividend cannot decline during the period. (For more on the Canadian companies that made the cut, see this story).

Potash began a steady climb in its payout in 2011, when dividends per share rose to 28 cents (U.S.) from 13 cents the year before. The dividend increased each year, and in calendar 2015, Potash Corp. paid $1.52 per share.

Alas, with continuing price weakness in fertilizers, the payout was in jeopardy.

Investors thought so, as the dividend yield began to top 10 per cent as the shares fell to $15 and below in late January. When the company announced its 2015 results and weak 2016 guidance Jan. 28, it also said the dividend would fall by 34 per cent, to $1 per share. The S&P committee made its decision by day's end and the TSX made the announcement.

The methodology for the index allows the committee to remove companies each quarter if they've cut the dividend in the interim, so it could easily have axed Potash in April. But the committee decided not to wait.

"Once Potash made the announcement, it was pretty clear they would come out," said David Blitzer, managing director of S&P Dow Jones Indices and chairman of the Index Committee. "Given that, we would have been in a situation of telling index funds to buy the stock, and a few months later, sell the stock, which would have looked like we were churning the brokerage accounts, which is not what we're supposed to do, obviously."

Mr. Blitzer says, "While market events do intrude, from time to time, and cause late announcements or revisions," he cannot recall a case where a company reduced its dividend after its addition to an index was announced and the decision was then reversed, in line with the stated index methodology.

"The committee, in its discretion, decided it was more advisable not to put it in at all," he says. "That's why we have committees instead of computers."