Fauji Fertilizer delivers dividend surprise

Rarely does the Fauji Fertilizer Company (FFC) disappoint its shareholders, especially on the dividend payout front. Yesterday was an exception.. The company declared an interim dividend of Rs2/share, out of the Rs2.83/share that it made as profits, taking the payout to as low as 70 percent. One cannot recall a precedence of such a low payout ratio for a company which usually gives out whatever it earns as dividend.
The question regarding the low payout will be best answered by the company officials who were not available for comments. One can predict an acquisition as a part of FFCs future plans - that of Agritech. There seems to be no other obvious reason for a cash rich company to deviate from its traditional payout policy.
FFC took a severe hit from the floods in the third quarter, more than what its peers took, as its sales during the third quarter alone nosedived by 33 percent on a year-on-year basis. Even prior to the floods, the urea demand was not as strong since it stayed down by 19 percent during the nine months. The saviour of the top line was the urea price increase, following the gas curtailment.
All else was predictable, as always is the case with FFC. The gross margins remained flat, as the minimal increase in fuel gas prices was more than offset by the increase in product prices.
Fauji Fertilizer Bin Qasim, as always, contributed significantly to FFCs bottom line with nearly Rs2 billion as dividend income booked by FFC. Had it not been a healthy 2QCY10 dividend announced by the FFBL, the 3QCY10 profits for FFC would have been even worse.
Going forward, FFCs core business seems to be strong enough. Yet, a nervy phase in the upcoming Rabi season cannot be written off. Luckily, though, it may be short-lived. If Agritech is really on the acquisition list, it shows the managements determination to maintain its market-leader status as Engros new urea plant will bring Engro almost at par with FFC.
Things might get clearer in a few weeks time, but by the looks of it and given the companys history, high leverage is not the route FFC usually takes. The curtailment of an interim dividend suggests that if FFC does go for an acquisition, it will finance it internally. It may result in a lower payout for some time, but will be better than paying a high financial cost like its peer. So the high dividend yields may come back soon.