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Compass Minerals Cuts Dividend by 79% to Focus on Growth

Yesterday, Compass Minerals surprised investors by cutting its dividend by nearly 80%. This drastic cut is part of a new direction in the company's capital allocation strategy to focus more on growing the business.

This strategy shift is primarily driven by the firm's discovery of a significant and sustainable lithium resource identified at its solar evaporation site in Utah.

The funds saved from cutting the dividend are expected to be used on developing this lithium site, with production expected to hit the market around 2025. 

Lithium is a critical component in rechargeable batteries, which are increasingly in demand with the expanding electric vehicle market. 

Assuming demand stays steady and lithium prices continue to trade within the ranges seen these past few years, Compass Minerals' sales could eventually grow by 20-50%.

In addition to the lithium discovery, the company also announced plans to acquire a 45% stake in Fortress North America, a next-generation fire retardant company that produces more environmentally friendly and carbon-neutral fire retardants used to combat wildfires.

As the population expands beyond highly urbanized cities in the western states, limiting the spread of wildfires will become increasingly important.

In addition to growing revenue, these new opportunities could also reduce the company's sensitivity to disruptive weather patterns like mild winters and dry growing conditions. 

Compass Minerals is a leading producer of salt (used for deicing highways and in various consumer and industrial applications) and specialty fertilizer (improves the quality and yield of crops).

Management believes these investments in diversifying its revenue streams will ultimately drive greater shareholder returns through price appreciation than otherwise would have occurred if it stuck to its original dividend policy.

It's unlikely Compass Minerals will restore its dividend levels seen earlier this year until after lithium production is productive and profitable, which, as noted, isn't expected until 2025.

Investors looking for income will be better served looking elsewhere for now. However, those who believe lithium will remain in demand may be rewarded down the road if the company's stock price begins to reflect the strong sales growth expectations.

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