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High-Dividend Yielding Fertilizer Stocks

The basic materials sector has been suffering lately, due to the worldwide economic meltdown as a result of the Euro zone crisis, a "more-or-less flat" (Buffet) economic growth in the U.S., and a sluggish growth on the part of the Chinese economy. Consequently, a risk-averse investor tries to avoid investing in this sector, as it entails taking too much risk without a likewise return. Amongst such an uncertain environment, Qineqt has tried to explore and analyze different dividend portfolios in various industries of the sector. The following piece relates to a high dividend portfolio in the Fertilizer Industry.

Fertilizer Industry

Fertilizer stocks have seen a rally over the past few weeks, as a result of the U.S. Midwest drought destroying corn crop yields, and resulting in a general spike in grains prices. We have continued to recommend fertilizer stocks, especially CF Industries Holdings (NYSE:CF), Potash Corp (NYSE:POT), and The Mosaic Company (NYSE:MOS), to play on the incline in corn prices. However, in our previous analysis, our focus was not on the dividend-paying abilities of these companies. Now, we scrutinize fertilizer stocks (and particularly, fertilizer MLPs (Master Limited Partnerships)), primarily from a dividend perspective.

Major Companies

In our potential dividend portfolio, we analyze three major companies; Terra Nitrogen Co LP (TNH), CVR Partners LP (UAN), and Rentech Nitrogen Partners LP (RNF).

Company Profiles

  • Terra Nitrogen Co LP

Terra Nitrogen Company, L.P. produces and sells nitrogen fertilizer products. It was acquired by CF Industries Holdings Inc. in 2010.

  • CVR Partners LO

UAN produces, distributes, and markets nitrogen-based fertilizers in North America. It is a subsidiary of CVR Energy Inc.

  • Rentech Nitrogen Partners LP

RNF is a "pure play nitrogen fertilizer company". It is a subsidiary of Rentech Inc.

Analysis

  • Business Perspective

As a result of the Shale gas boom, the Fertilizer Industry in general, and the manufacturers of nitrogenous fertilizers in particular, have benefited from this 'feedstock advantage'. In addition, rising corn prices as a result of the U.S. Midwest drought have been a catalyst for a rise in the share prices of such companies.

  • Cash Flow & Liquidity Perspective

TNH

UAN

RNF

Cash distribution per common liability partnership unit (MRQ)

$4.00

$0.52

$1.06

% change in Cash and Cash equivalents (QoQ)

-6.17%

-4.81%

62.55%

Free cash flow yield

8.50%

4.57%

N/A

In such limited partnerships (LP), an important indicator is cash distribution on a per common LP unit. In this regard, TNH is the clear winner. Plus, its free cash flow yield of 8.5% is also the highest among its peers.

  • Dividend Perspective

The following table summarizes some dividend-related essential facts about these fertilizer companies:

TNH

UAN

RNF

Dividend yield

7.94%

8.92%

8.06%

Dividend payout ratio (NYSE:TTM)

197.35

78.4

N/A

Dividend per share (MRQ)

$ 4.53

$ 0.59

$ 1.06

Earnings per share (MRQ)

$ 3.78

$ 0.41

$ 0.51

Source: Yahoo Finance and Reuters

A quick glance at this table suggests that all these companies have high dividend yields, in between 8%-9%. In the most recent quarter (MRQ), the per-share dividend exceeded earnings per share (EPS) for all of these companies, exhibiting a payout ratio of more than 100%. The following graph shows the historical dividend yield pattern for TNH and UAN. The graph for RNF is not included because its recent dividend of $1.06 per share is its "first cash distribution" since it started trading on the NYSE. An important point is that RNF's dividend per share is equal to its cash distribution per common LP unit ($1.06), which shows that the company has paid entire dividend out of its cash, as a result of its strong cash flow position.


(Click to enlarge)

Source: YCHARTS

  • Valuation Perspective

TNH

UAN

RNF

Forward P/E

N/A

13.86

11.65

PEG ratio (5 year expected)

N/A

N/A

0.86

EV/EBITDA

6.89

9.52

9.94

Price / Cash Flow

12.36

10.33

-

Share price performance (YTD)

27.26%

-2.22%

86.29%

The EV/EBITDA ratio is the lowest for TNH (6.9x), while its price to cash flow (12.4x) is the highest. On the contrary, RNF has the highest EV/EBITDA (9.9x), which shows that the stock is relatively expensive. This is evident from a significant increase in its share price of almost 86%, as against that of TNH's 27% and UAN's -2.2%.

(Note - The operating cash flow of RNF (on a TTM basis) is negative (-6.21 million), and so, its price per cash flow has not been incorporated).


(Click to enlarge)

Source: Google Finance

Conclusion

RNF is the best performing dividend stock among these three fertilizer companies, but we feel that its stock is already reflecting this potential, as is evident from the considerable YTD appreciation in its share price, as well as its high EV/EBITDA. However, it is a pure dividend play and might be a good investment for those whose main aim is income growth.

We are more inclined towards TNH and UAN due to their history of maintaining high dividend yields, along with their relatively cheap valuations. TNH is our favorite pick due to its high free cash flow yield, and highest cash distribution per common LP unit. UAN is also a good buy, especially because its dividend yield has followed an upward-sloping trend, and it is a relatively cheaper stock.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: 3 Fertilizer Stocks Having A Dividend Yield Of 8%