Potash Corporation (TSX: POT, NYSE: POT) announced this morning that its board of directors decided to cut the quarterly dividend from US$0.38 to US$0.25 per share. This was done to “preserve the strong balance sheet and investment-grade rating.”

The dividend reduction comes as an unpleasant surprise, especially since the CEO recently indicated (on several occasions) that the company would still be able to maintain its dividend at much lower potash prices.

Fourth-quarter results were rather weak, which was not unexpected since fertilizer prices have been dropping sharply over the past few months. Earnings per share for the quarter (reported in US$) were 51% lower than a year ago, while cash flow from operations dropped by 13%.

Management’s outlook for 2016 indicates a further decline in earnings per share of around 30%, with profits from both potash and nitrogen dropping mainly as a result of a weak pricing environment.

Potash Corp. was selected as a member of our Dividend Champions Portfolio for its ability to sustain its dividend. We based our assessment on the dividend track record, abundant cash flow, strong balance sheet, and adequate dividend coverage.

Unfortunately, we did not give enough weight to the negative impact that industry overcapacity would eventually have on the fertilizer pricing environment.

We stand by our analysis that the market value of the company substantially underestimates the long-term value of the business.

However, our focus is primarily on the dividend. And given the bleak outlook provided by the company for 2016, coupled with the surprising decision to cut the dividend (with perhaps more cuts to come), we’re selling the stock from the Dividend Champions Portfolio. Potash Corp. is now a Sell.