Fertiliser maker Yara International ASA is shifting to a more generous dividend policy on the back of strong global demand and its nearly debt-free balance sheet.
The Norwegian group, which ranks as the world's largest nitrogen-based fertiliser maker, said it had in the past been too determined to maintain stable dividends and avoid a cut and had therefore fallen short of its target to pay out between 40 and 45 percent of net income.
"We have perhaps focused too much on that dividends should be even and predictable, and to avoid a decrease," Chief Financial Officer Torgeir Kvidal told Reuters. "But we should stay closer to our 40 to 45 percent ... target, which would then lead to a higher dividend."
Yara, which last year paid out 7 crowns per share, has minimal borrowings but is sitting on cash it previously raised for acquisitions. In 2010 it failed to buy Terra Industries Inc, which was eventually bought by CF Industries for nearly $5 billion.
In a statement ahead of a presentation to investors on Tuesday, Yara said it expected a tight grain market to drive strong demand for fertilisers next year.
The group, which had sales volumes of almost 20 million tonnes last year, is benefiting from rising fertiliser demand as farmers worldwide look to boost output to feed growing populations, but its earnings are still highly dependent on prices set by China.
With Chinese coal prices having declined significantly in over the last year, fertiliser production has become cheaper in the world's dominant fertiliser country and its export tax regime less restrictive.
Yara said it had become more pessimistic on the price outlook than a year ago, partly due the impact on prices from Chinese exports.
Yara has already been hit by lower global nitrogen fertiliser prices this year as Chinese export prices have declined due to lower export taxes than in 2011.
"Global nitrogen fertilizer prices will in 2013 most likely be set by the balance between Chinese urea (fertilizer) export pricing and farmers' strong incentives to increase planting and application of fertilizer," it said in the statement.
Capacity growth outside China is likely to be below consumption growth next year and China is likely to keep a "swing role" on the fertiliser market during the second half of 2013, it said.
Yara's outlook included a set of scenarios for potential earnings per share in the range of 20 to 57 crowns in 2013, compared with a 2011 total of 41.99 crowns and a 2012 range of 28 to 55 in last year's outlook.
Yara said it saw next year's prices for urea in the Black Sea port of Yuzhny at around $325 per tonne under a pessimistic scenario, in which China exports nitrates at zero margins. Under Yara's more optimistic demand-driven scenario, prices could reach $515 per tonne.
The price of urea at Yuzhny, the benchmark for urea in Europe, stands around $385 million per tonne after peaking at around $540 per tonne in late April and early May.
Yara aims to increase own-product and joint venture product sales by 8 million tonnes by 2016 from the 2010 level, and has so far come roughly half the way to reach that target.
"We have only three years to go ... and three years to build a greenfield project is out of question. Here we're talking about mergers and acquisitions," Chief Executive Joergen Haslestad said.
He added that he saw most potential to find targets in eastern Europe and Latin America, while there was little potential in North America.
"We shall focus on upgrades of brownfield (sites) and small to mid-sized regional acquisitions," Chief Financial Officer Torgeir Kvidal said.
Cheap North American shale gas has induced fertiliser makers to invest heavily in new capacity in the region, with many new projects due to be completed in 2015 and beyond.
Yara shares, which spiked to a six-week high of 285.1 crowns last Friday, were up 0.1 percent at 278.6 crowns by 1045 GMT. (Editing by Jane Merriman and David Holmes)