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Terra Nitrogen (TNH), a master limited partnership (MLP) is one of the leading producers of nitrogen fertilizer products. The company's main products are anhydrous ammonia and urea ammonium nitrate solutions (UAN). Terra pays a very nice 8.07% distribution, as of this writing, however distributions from MLPs are subject to different taxes than ordinary dividends. Before moving on to specific valuation of TNH, I'd like to give you a brief background on what MLPs are and what it means to you as an investor.

A master limited partnership is a limited partnership that is publicly traded on a securities exchange. It is a favorable corporate structure because it combines the tax benefits of a limited partnership with the liquidity of publicly traded securities. United States Code limits MLPs to enterprises that engage in certain businesses, mostly pertaining to the use of natural resources.

Their tax treatment is similar to REITs, and MLPs pay their investors through quarterly required distributions, the amount of which is stated in a contract between the limited partners (investors ) and the general partners (managers). Tax implications for individual investors can be complicated. Distributions from MLPs are taxed at the marginal tax rate of the limited partner, however investors may record a pro-rated share of the MLP's depreciation on their own tax forms to reduce the tax liability.

Now, back to Terra ...

Stock Performance

Based on share price alone, Terra has done extraordinarily well for its investors. Over the past 10 years, the price per share has risen from $5.86 to its current level of $208.83, a staggering 49% average gain. In fairness, a good chunk of this performance happened in 2007, when the stock nearly tripled in value. Regardless, the chart below shows the upward momentum of the stock throughout the majority of the decade.


(Click to enlarge)

Now, because Terra is an MLP, the cash distributions are somewhat different and less consistent than the dividends one would normally think of. Over the past 10 year period, TNH's income rose dramatically from 2003-2008, then fell during the financial crisis, and resumed its growth over the past two years. In fact, 2012's distribution is the company's highest yet.


(Click to enlarge)

Valuation

Terra trades at 12.8 times TTM earnings, below the sector's average of 17.3. However, for an MLP, price to earnings is not the most significant way to value the company. More important for an MLP is the amount of distributable cash flow, which is clearly on an uptrend. For example, in 2010, the company's net income was $202 million, of which $130 million was distributed to shareholders. In 2011, the company earned $508 million and paid out $449 million. 2012 numbers are not available yet, however if the payouts are any indication, the uptrend has continued. Also worth noting is that the company has over $300 million is assets and zero debt.

Conclusion

While the above chart will clearly show that the amount of Terra's dividend is never a sure thing, this MLP has an excellent history of increasing shareholder value and cash flow. In addition, analysts are very bullish on Terra, with a 1-year price target of $268.76, which represents a 28.7% potential upside over current price levels. The company also has a fantastic balance sheet (how often do we see no debt whatsoever nowadays?), making this a nice addition to any income portfolio.

Source: Terra Nitrogen: 8.07% Yield And Upside