Saskatoon-based Potash Corp. of Saskatchewan (TSX?"EURPOT) has made a takeover bid for Germany-based K+S AG. It has offered 41 euros each for all of K+S's shares, for a total of about US$8.7 billion.
The main attraction for Potash Corp. is the Legacy potash mine which K+S is building in Saskatchewan. Starting in 2017, that mine is expected to produce about three million tonnes of potash a year. In addition, Potash Corp. would gain K+S's European potash operations. K+S has rejected Potash Corp.'s bid, saying that it's much too low.
If Potash Corp. can't complete a 'friendly' transaction, it may go 'hostile' and take its offer directly to K+S's shareholders. They may accept the offer since it's 57 per cent more than K+S's stock market price over the previous year.
Potash shares remain a buy for long-term share price gains and attractive, rising, dividends. This potash mining stock's long-term outlook remains strong.
In the three months to March 31, Potash Corp. earned $370 million, or 44 cents a share (all numbers in U.S. dollars unless preceded by a C). This was up by 10 per cent from earnings of $340 million, or 40 cents a share, a year earlier.
President and chief executive officer Jochen Tilk said, "We delivered stronger earnings compared to last year's first quarter on improved potash and phosphate contributions." This was thanks to a combination of higher prices and lower costs. Higher potash and phosphate contributions more than offset a lower nitrogen contribution and higher provincial potash taxes.
Mr. Tilk issued a profit warning. He said, "We adjust our full-year guidance largely on higher Saskatchewan potash taxes and first-quarter performance that trailed our initial expectations." Mr. Tilk now expects Potash Corp. to earn from $1.75 to $2.05 a share in 2015.
Saskatchewan's higher taxes on potash are expected to reduce Potash Corp.'s earnings by seven cents a share this year.
Despite the profit warning, Mr. Tilk is optimistic about Potash Corp.'s near-term outlook. He said, "Looking ahead, we are encouraged by the strength in global potash demand and see momentum accelerating through the second quarter, especially in offshore markets."
Convert Potash Corp.'s expected earnings per share to loonies and you get an earnings range of C$2.13 to C$2.49 a share. Divide the share price by mid-point of C$2.31 and the stock trades at a forward price-to-earnings, or P/E, ratio of 17.1 times. Based on next year's expected earnings of C$2.76 a share, the stock trades at a better P/E ratio of 14.3 times.
What's more, these earnings exceed Potash Corp.'s dividend of C$1.85 a year. This suggests that this 'dividend aristocrat' will at least maintain its dividend. If so, you can earn an attractive dividend yield of 4.7 per cent. That is, you'll get paid handsomely to wait for the share price to move up. More likely, the company will use its growing earnings per share to further raise your dividends. This will keep improving your yield. Even better, high and rising dividends will likely attract income-seeking investors who will bid up Potash Corp.'s share price.
Potash Corp.'s long-term outlook is also favorable. The fact is, fertilizers can assist farmers in growing more crops and making more money. Hundreds of million of Asians are rising from poverty to the middle class. As they do, they're going to eat bigger meals more often. In addition, growing meat consumption in Asia requires crops to feed animals. Then, too, the world's population grows by about 70 million people a year. As a result, the need for the fertilizers that Potash Corp. produces is likely to grow much further.
Potash Corp. remains a buy for long-term share price gains and attractive, rising, dividends.
The Investment Reporter, MPL Communications Inc.133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846