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Terra Nitrogen Company, L.P. (TNH) is a very interesting stock. The assets of this limited partnership consist of a single, large nitrogen fertilizer plant in Verdigris, Oklahoma. The company's nitrogen based fertilizer products are primarily used by corn farmers. The major raw material is natural gas.

Right now, the market for Terra Nitrogen is very good - U.S. corn farmers got an early start due to the mild winter, fertilizer supplies are tight, prices are rising and natural gas costs are low. It is a perfect storm for profits. Throw in a 6.8% dividend yield and this stock looks too good to pass up. However, before picking up shares in Terra Nitrogen, investors should understand a little more about the company.

The fertilizer business is very cyclical, price-wise. Once upon a time - in 2007 and 2008 - investors believed that the commodity boom would allow fertilizer companies to become growth stocks, not cyclical stocks. The great beneficiary of this belief was Potash Corp. (POT) which went from a $10 stock - split-adjusted - to a $77 stock in two years then back to an $18 stock in less than six months.

Through the boom and bust, Terra Nitrogen maintained a better level of price stability - relatively speaking - by paying out very attractive partnership distributions as prices rose. During 2007 and 2008, the share price gyrated around a mid-point of about $105 and the dividends paid per share in 2007 and 2008 were $7.64 and $15.08, respectively. An interesting phenomenon during that period was how the stock price would run up significantly - once by $50 - before distributions were declared and distributed.

As the cycle in fertilizer prices and corn turned down, so did the distributions from Terra Nitrogen. The company paid out $8.92 per share in 2009 and $5.01 in 2010. Throughout the time period of 2007 through early 2011, the Terra Nitrogen share price remained pretty much range bound with a few short excursions above $140 per share.

In 2011, Terra Nitrogen again turned very profitable and significantly increased the distribution amounts, paying out $13.91 per unit over the course of the year. Coming into 2012, the company declared a $4.53 distribution for the first quarter and the second quarter dividend announcement should come out any day now. This time around, the Terra Nitrogen share price has taken off with the increase in distributions. The share value has climbed from $108 at the end of 2010 to the current $230 and the share price approached $300 a month ago.

Going forward, Terra Nitrogen should pay a very attractive dividend for at least the next two quarters. As noted above, all of the stars are aligned for a nice run of profits. However, the current share price puts investors buying now, at current price levels, at significant risk of a share price decline when fertilizer prices again turn to lower levels.

Before closing out this little history lesson, investors should know a few more facts about Terra Nitrogen. The general partnership units and 75% of the L.P. units are owned by CF Industries (CF). The partnership agreement heavily favors the general partner as profits increase. For example, in 2010, Terra Nitrogen earned $201 million and the general partner received $51 million - not including regular distributions on its 75% unit holdings. In 2011, profits increased to $508 million and the general partner received $219 million. The general partner basically receives 50% of all profits above a certain level. The Terra Nitrogen holdings accounted for about 30% of the very nice level of profits CF earned in 2011.

At current share price levels, Terra Nitrogen poses too much of a risk of a significant share price decline later in 2012 or early in 2013. Investors must either watch the shares and distributions like a hawk and get ready to exit as soon as it appears the distribution rates will start to fall or wait until the cycle completes a drop and pick up shares on the cheap for a long-term investment. Attractive entry points would be the share price below $120 or when the quarterly distribution drops below $2.00 per unit.

Source: Terra Nitrogen Is At The Wrong Point In Its Business Cycle