BHP Billiton (NYSE: BHP) has withdrawn its its bid to purchase Canadian fertilizer company Potash (NYSE: POT) and now plans to buy $4.2 billion of its own stock. BHP shareholders are relieved. The $39 billion it planned to spend on Potash was a large commitment which would have strained the Australian miner’s balance sheet.
Potash investors face a very different future. The firm’s shares traded for just over $100 before the buyout offer which took the stock to over $150. There had been some hope among Potash management and its board that a white knight would emerge. The Canadian government crushed that possibility when it labeled Potash as a strategic national asset. In other words, it will have to rely on its own earnings power to keep its market value high. And, that is not likely to happen, at least in the foreseeable future.
The demand for potash has risen, especially in China. The needs for more agricultural commodities around the world will likely continue to grow as demand for corn, wheat, and soy are rising rapidly. But, analysts estimates for the improvement in Potash’s EPS, while good, hardly support a $150 stock price. The mean analyst recommendation on the stock is about equally weighted between buy and sell according to Thomson Reuters data. Wall St. does not think Potash shares will stay at current levels
Potash shareholders can pressure the company to push its dividend higher. The firm’s yield is only .3%. The current dividend does not make Potash shares attractive for investors who want something beyond the prospect of growth. Potash could also buy back shares to increase EPS. But dividend increases and share buy backs often do little to improve share prices unless investors see that profits are growing
Potash has put itself in a corner, with investors at least. It may take years for its to justify a share price of $150 if it ever can at all.
Douglas A. McIntyre
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