Potash Corp. of Saskatchewan Inc. has slashed its dividend for the first time in the company's history, highlighting the tension between generous shareholder payouts and dismal commodity prices across the resource sector.
Jochen Tilk, chief executive of the Saskatoon-based company, said in an interview that the board carefully researched alternatives before deciding on the cut, the first since the company's initial public offering in 1989.
He said the goal was to arrive at a sustainable payout that would also protect the business's strong balance sheet. The board ultimately decided to chop the annual dividend by 34 per cent, to $1 (U.S.) a year from $1.52.
"We took a cautious and conservative approach in the current market environment … and balanced that with our confidence in the business," he said.
The cut marks a major shift in Potash Corp.'s attitude. Back in 2013, former chief executive Bill Doyle famously declared that the company's dividend was "sacrosanct" after slashing hundreds of jobs in the miner's home province. His defence of the dividend drew a withering response from Saskatchewan Premier Brad Wall.
This time around, Potash Corp. drew flak for the opposite reason – some analysts felt its dividend cut didn't go far enough, given the lacklustre earnings announced by the company and its underwhelming guidance for the year ahead.
Joel Jackson of BMO Nesbitt Burns said the market had expected the payout to be cut in half.
"The real story is how poor 2016 guidance is due to weak potash fundamentals," he wrote in a note to clients. "A 34-per-cent dividend cut may not be deep enough for a sufficient safety cushion."
The dividend, even at its reduced size, will gobble up all of Potash Corp.'s expected earnings this year, leaving it with limited financial space to manoeuvre if fertilizer prices do not improve.
The entire commodity industry is wrestling with the issue of how to satisfy yield-hungry investors while conserving cash as materials prices keep tobogganing lower.
Many companies in the sector have already chopped or erased their payouts, but some major producers pride themselves on their long history of steadily rising dividends and have resisted the trend.
Potash Corp. was one holdout until its announcement Thursday. BHP Billiton Inc., the world's largest miner, is another dividend diehard, but it is widely expected to announce a cut when it releases earnings next month.
Potash Corp.'s turnaround on the issue reflects the dismal market for fertilizer. Earlier this month, the company mothballed its new potash mine in Picadilly, N.B., resulting in the layoff of more than 400 workers.
The bleak market conditions came into sharper focus on Thursday, when the company announced that it had earned 24 cents a share in the fourth quarter, less than half of what it generated a year earlier and below analysts' forecasts.
Its guidance for 2016 also disappointed. The company said it expects to make 90 cents to $1.20 a share in 2016, which would be its smallest profit in a decade and far below analysts' expectations of $1.33 a share.
The average prices that Potash Corp. has received for its namesake product have tumbled, falling from $284 a tonne a year ago to $238 in the most recent quarter.
The biggest decline in sales volume came in North America. Growing foreign imports are providing strong competition, while three years of bumper crops have driven down the price of many agricultural commodities, pinching farmers' wallets and reducing their fertilizer budgets.
The company also had challenges in Brazil, where the tumbling value of the currency, as well as growing credit risk, put a damper on sales.
Looking ahead, Potash Corp. is still negotiating this year's supply contract with Chinese buyers, but most observers expect current market conditions to be reflected in sharply lower prices in the new deal.
Analysts also point to the increasing supply of potash that will come on the market over the next couple of years, when K+S AG, a German fertilizer producer, opens its Legacy mine in Saskatchewan.
Despite the challenges, Mr. Tilk insisted that the market remains robust. He expects global potash shipments of 59 million to 62 million tonnes this year, little changed from the 60 million tonnes shipped in 2015.
"We are committed to matching supply to demand," he said, but added that no more dividend cuts or mine closings are on the horizon.