Can Potash Corp. afford an acquisition?

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Here we go again. Almost a year after Potash Corp. of Saskatchewan attempted to boost its stake in Israel Chemicals, the fertilizer giant is making another approach. But this time it could be for the whole company.

The question now is whether Potash can afford it.

For the Canadian company, hiking its 14 per cent stake in ICL to say, 50 per cent, would cost $4.7-billion, based on current market values, and acquiring all of ICL would cost at least $13-billion, according to BMO Nesbitt Burns.

With a market value of $35-billion, that isn't really a problem for Potash Corp. at first glance. However, the Canadian giant doesn't have much cash on its books – just $461-million as of last quarter.

On the bright side, its debt load is only $4.1-billion, which is just 0.8 times earnings before interest, taxes, depreciation and amortization, so Potash has room to borrow. But anything it tacks on will suck funds away from dividends.

Just last month, Potash Corp. hiked its dividend by 50 per cent to 21 cents per share, marking its third increase in two years. At the time, many saw it as a sign that company expected cash flows to remain strong. But then the fertilizer giant released its quarterly earnings last week, and they weren't very hot.

Still, there was continued chatter of returning more cash to shareholders. Even with weaker results, Potash's brownfield spending is winding down, and that frees up funds for things like dividends, or even share buy backs.

That could still be the case, because Potash has more options than simply just tacking on debt to fund an ICL acquisition, should the Israel government allow them to proceed. As analyst Joel Jackson at BMO notes, Potash could possibly sell its minority stakes in Jordan's Arab Potash Co., China's Sinofert Holdings or Chile's Sociedad Quimica y Minera de Chile SA to help raise the necessary cash.

Yet another option: Potash could pay for the deal in shares. But while that seems cheap initially, the company's dividend payment will immediately go up each quarter, because they'll be new shares in the market. That could sting in the future if the acquisition ultimately isn't accretive.

So yes, Potash can afford a deal. But no one is quite sure of how it would alter the company's recent strategy. Since 2010, its dividend payout ratio has jumped from just north of 5 per cent to 25 per cent of 2013 expected income and the shares currently yield about 2 per cent. Is this the limit?

If dividend growth does slow, keep in mind that investors may gain more over a longer time horizon. "We believe a key rationale for [Potash Corp.] to control a larger or controlling stake in ICL would be to (eventually) secure marketing control of one of the two large potash producers (ICL and K+S) not part of the two main marketing organizations (Canpotex and BPC).," Mr. Jackson notes. In other words, there's long-term value there.

Potash first requested permission to increase its stake in ICL to 25 per cent last December but pulled the request after it got tied up inside the Israeli government.