CF Industries Holdings, Inc. (NYSE:CF), which is the largest producer of nitrogenous fertilizers in the US has been suffering from a fall in profits due to a challenging operating environment in Q3. However, considering the cyclical nature of the fertilizer business, such conditions are likely to improve in the near future. The company is in the process of closing a deal with potash-manufacturer The Mosaic Company (NYSE:MOS) which will result in the company selling its phosphate facilities to Mosaic. The deal will help CF focus on its core nitrogenous products and provide it with some welcome cash. This cash will be significant since it is under pressure to raise its dividend from activist Daniel Loeb. These factors indicate that not only is CF expected to remain firmly on the growth chart going forward, but that it will provide good dividend increases as well.
Headwinds in the fertilizer industry
CF has been operating in a very difficult operating climate. Q3 is usually the harvesting season for the American agricultural sector, and demand for fertilizer during this period is slow. Additionally, the energy boom has pushed down prices of natural gas and nitrogenous fertilizers. As a result buyers have been forced into a wait-and-watch mode. Urea shipments fell 3.55% in Q3 this year compared to last year, while ammonia fell 2% and UAN 10.17%.
The good news is that nitrogenous fertilizers are needed every year and those who have been waiting on the fence to see how far the prices will fall will have to restock soon. This will aid the natural growth of demand that follows the harvesting season. The competition pouring in from China is likely to ease as the export window closes. It may be argued that falling prices has actually helped CF indirectly, since the company seeks to capture the low-cost segment. CF's operating margin has doubled in the long run from 21.82% in 2007 to 47.71% in 2012.
The deal with Mosaic
CF recently announced a $1.6 billion deal with Mosaic, which will allow the company sell its South Pasture mine and Plant City processing plant. This is expected to benefit both companies. Mosaic will add to its already impressive phosphate capacities and CF will gain cash needed to add to its capital returns. This will also aid in the $3.8 billion expansion in its Port Neal and Donaldsville facilities. CF will now be able to focus on its core nitrogenous businesses.
CF has also created an agreement to supply Mosaic with 600,000 to 800,000 tonnes of ammonia every year, thus ensuring that there is always a certain level of demand for its ammonia production.
Rise in dividends
The $1.6 billion deal with Mosaic should also allow the company to raise its dividend. Activist investor Daniel Loeb's firm Third Point LLC made an announcement that it now holds 1.5% stake in CF. Loeb later argued that the dividend paid by the company is too low compared to its peers. This led the company to raise the dividend by 150% from $0.40 to $1.00. The company may be able to raise the dividend again after results from the Mosaic deal and rise in shipments take effect.
The investor's call
It is true that CF Industries is facing tough market conditions, but these are clearly not expected to stay for long. The deal with Mosaic and the expansion that the company is undertaking currently are expected to benefit the company in the long run. Despite having been pushed into raising its dividend by Loeb it will still likely do so again. All of the aforementioned factors indicate CF may have good days ahead. The investor who already has the company in his/her portfolio would therefore be advised to "hold" the stock for now, while those with an eye on good dividend-yielding stocks may consider buying into the company's stock.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.