Let’s get dirty. Let’s dig around in the ground and look for some cash. That’s what The Mosaic Company (NYSE: MOS) does, everyday. Although lately that cash seems harder and harder to find. What do they do? They mine and process minerals that eventually make their way to farmers for use as fertilizer. Mosaic produces around 12% of the world’s annual capacity of potash, which makes up 41% of North American capacity. Their phosphate segment is even more impressive. Mosaic basically digs these important crop nutrients out of the ground and sells them to distributers and farmers.
The world population is growing, right? And people have to eat, right? Developing nations are consuming more calories. People are eating better all over the world, right? There’s only so much farmable space on the planet, so we need to utilize that space as best we can to feed all these people, huh? Slow down.
That’s been a major investment thesis for Mosaic and other fertilizer companies for years. Open a 10 year chart of Mosaic, or Potash Corporation of Saskatchewan (NYSE: POT) or most any other fertilizer or agricultural stock. Many of these charts look pretty ugly over that time period. Demand for calories is on the rise, sure, but is that the only part of the story? Generally, if an investment thesis is that obvious and well known, it seems to me that it doesn’t always work out as investors plan. Let’s dig deeper.
Mosaic is currently trading around $25 to $26, near multi-year lows. Why? Because of the price of potash and phosphates. Belaruskali, a major foreign player in the potash business, recently announced a large deal with India, selling 700,000 tonnes for $227 per metric ton. Last year the price was $332. This represents a 10 year low in potash prices. The upper end of that 10 year range is around $850. This informative Investopedia article has more detail on the deal. Phosphate prices are also currently very weak.
What makes Mosaic interesting to me? Aside from the usual ‘beaten down stock’ syndrome I seem to be so in love with, it’s the dividend. At $25, Mosaic offers a 4.4% yield. Not too shabby, as dividends go. But how safe is that dividend? There are good arguments on both sides of this ‘safety’ issue, and I believe this issue is key to finding the right time to invest in MOS.
So why might this dividend be safe? Mosaic has a great balance sheet: almost $4 billion in current assets, while only about half that in current liabilities. A nice balance sheet is great to see in a company going through tough times in its larger market. MOS pays out around $96 million in dividends each quarter, so there is reason to believe that the company could maintain the dividend in tough times, if it wanted to. Also, Mosaic’s earnings over the past year have exceeded (lowered) expectations, despite the tough pricing environment. Another positive sign, Mosaic earned $2.78 to $2.90 a share in 2015 (depending on what financial site you use to gather information!), while only paying out about $1.075 in dividends. So their coverage ratio is good!
So why MIGHT they cut their dividend? Despite Mosaic’s strong performance so far, 2016 earnings are expected to plummet. Some expect earnings to be below the current amount paid in dividends. So maybe the company tightens its belt and cuts the dividend even though it may not necessarily HAVE to because of its strong balance sheet. That’s a reasonable thing to worry about. Why drain cash to fund a dividend? Funding a dividend from cash on hand could potentially hurt the company’s credit rating.
So what will happen here? Darned if I know. If I had to guess, I’d say that Mosaic won’t cut their dividend. But that is by no means a prediction that I’d stake much on. In fact, at current prices it’s not a prediction that I’d stake anything on. So here’s the game plan. Mosaic hit a recent low of $22.02 in early February. I’m hoping that that dividend fears bring the stock price down even lower than that. Maybe to the high teens? Then I’d be very interested to start a position. Or maybe they do cut the dividend suddenly and the price dives. I’d love to be there to pick up some shares in that case. Patience can keep me out of some good investments, but it can also help keep me out of trouble while I’m learning how to navigate around Mr. Market.
As always, feel free to look at my portfolio and see how I’m doing. Usually I own or plan to own stock in many of the companies I write about. Specific numbers I reference may not be completely accurate; different online financial sources often have somewhat conflicting information. Verify information via multiple sources you trust. Please READ MY DISCLAIMER. Make your own decisions, do your own research, and never rely on any single source for information. I am not a financial professional; do not rely on me as such.
Michael, the Stock Picking Bartender,