For the time being, we believe rock salt is here to stay.
Mine depletion is another risk to consider because salt deposits are not growing as quickly as CMP’s annual production. However, CMP estimates that its two largest mines have 120 and 76 years left of production, respectively. We won’t be around the see the end of their useful lives.
Our biggest long-term concern with the stock is its sulfate of potash (SOP) business. While we believe in the demand growth story over time, the agricultural market is very global and unpredictable. With SOP fetching meaningful price premiums over basic potash fertilizers with chloride, capital would suggest that more supply will enter the SOP market, alternatives will become attractive (e.g. substituting higher levels of more basic fertilizers), or something else will reduce the industry’s profitability.
IC Potash is substantially bringing on more SOP supply next year, including in the California market, and CMP is also increasing its capacity. How these changes will impact the SOP market and CMP’s low-cost business is uncertain.
During its most recent earnings call, CMP noted that market pricing for most of the crops it serves has been healthy in 2015, helping keep SOP prices almost flat year-to-date despite volumes that are down 16%. The agricultural market’s broader weakness is impacting the performance of its plant nutrition segment because it has created general hesitation by growers to make purchases.
When combined with the extremely mild winter weather, it’s no surprise why the stock has been a poor performer over the last year. We believe the salt segment’s challenges are truly temporary and will continue watching SOP market dynamic as more supply appears set to appear in the next 1-2 years. For now, we are glad that salt still drives over 70% of the company’s earnings.
Let’s take a look at CMP’s dividend.
Dividend Analysis
We analyze 25+ years of dividend data and 10+ years of fundamental data to understand the safety and growth prospects of a dividend. CMP’s long-term dividend and fundamental data charts can all be seen by clicking here.
Dividend Safety Score
Our Safety Score answers the question, “Is the current dividend payment safe?” We look at factors such as current and historical EPS and FCF payout ratios, debt levels, free cash flow generation, industry cyclicality, ROIC trends, and more. Scores of 50 are average, 75 or higher is very good, and 25 or lower is considered weak.
CMP’s dividend has an average Safety Score of 53. Over the last four quarters, CMP’s dividend has consumed 49% of its earnings. This is a very reasonable level for a recession-resistant business. As seen below, the company’s payout ratios have been somewhat volatile over the last decade but have averaged around 50-60%, providing reasonable cushion and opportunity for dividend growth.
Source: Simply Safe Dividends
Source: Simply Safe Dividends
During the financial crisis, CMP’s sales fell by 18% in fiscal year 2009, driven completely by fertilizer sales, which fell by 44% after nearly doubling in 2008. Salt sales were down just 3% and highlight the recession-resistant nature of CMP’s primary business. The stock also returned 46% in 2008, significantly beating the market as fertilizer prices roared.
Source: Simply Safe Dividends
Despite being a fairly capital intensive business selling commodity products, CMP’s competitive advantages have helped it maintain a very strong and consistent operating margin profile, which is often the sign of an economic moat:
Source: Simply Safe Dividends
The company has also generated positive free cash flow in each of the last 10 years. Free cash flow trends are volatile because of the sizeable maintenance and growth capital expenditures occasionally needed at CMP’s production sites. The company’s capex will remain elevated in 2015 and 2016 (around $225 – $250 million per year) as it invests for growth but will drop to less than $100 million per year in 2018 and beyond.
Source: Simply Safe Dividends
