In an environment with so much uncertainty, it is imperative to perform enough due diligence on a company to feel comfortable enough it will be able to withstand the tough times. We are also in one of the lowest interest rate environments on record, so investors are increasingly looking for yield. But you don't want to invest in a high yielding company with a low probability of surviving or companies in sectors with dim prospects simply to obtain an attractive dividend.
For the last few weeks, agricultural prices have been rising due to one of the most severe droughts in recent history and there are companies that benefit from these types of conditions. As farmers search for ways to increase yields in adverse conditions, they require agricultural inputs that enhance their crops or at worst, provide adequate output with less resources such as water.
We looked for companies that paid a high dividend, but that also had high levels of current cash and attractive operating income.
Dividend Yield: the dividend yield is the amount of the annualized dividend payment divided by the current share price. Dividends are typically paid quarterly. A high dividend provides an investor with income from the investment in that stock, and also provides somewhat of a cushion against price drops. For example, a dividend yield of 5% allows for the price of a stock to fall by 5% per year and the investor will still be breaking even. The key for the dividend is it's sustainability. The more the cash on hand and the higher the cash flow generated, the more likely the dividend will continue or increase. And we should also be mindful of the payout ratio, which is the percentage of earnings paid out in dividends. A payout ratio that is unsustainable can threaten the viability of the dividend and the company.
Cash/Total Assets: Cash on hand is good to have during economic uncertainty and for opportunistic investments. We screened companies for Cash/Total Assets in excess of 10% on their balance sheet as of the last quarter. Lots of cash isn't always a good thing if it's not earning anything. Our assumption here is that at least they have enough cash to operate if times get tough. If a company uses it for acquisition, that may even be better, but we had no way of screening for the possibility of that.
Operating Income Growth: Growth in operating income indicates a companies ability to 1. Grow revenue, and/or 2. Reduce cost of sales, and/or 3. Reduce operating expenses. A decrease in expenses alone is not beneficial over long periods, but when accompanied by strong revenue growth, it may be a harbinger of good things to come.
We screened companies for a Dividend Yield greater than or equal to 5% (Dividend Yield>=5%), Cash/Total Assets of greater than 10%, Operating Income Growth>=15%, and Revenue Growth>=10%.
The following three stocks were chosen because of our positive view on the agriculture sector, but we did not screen for market cap.
1. Terra Nitrogen Co. LP (NYSE:TNH)
Terra Nitrogen LP produces and distributes nitrogen fertilizer products. The company's customers include farmers in the central and southern Plains regions of the United States. Most of the company's products are based on urea ammonium nitrate solution, and others are based on ammonia and urea. All of the company's products are sold on a wholesale basis. The company's plants are located in Oklahoma and Arkansas. Terra has a dividend yield of 7.2%, cash/total assets of 59%, year-over-year operating income growth of 151% and revenue growth of 42%. It is up 38% YTD and may continue to go higher.
2. CVR Partners, LP (NYSE:UAN)
CVR Partners, LP owns, operates and grows its nitrogen fertilizer business. CVR has a dividend yield of 8.87%, cash/total assets of 30%, year-over-year operating income growth of over 500%, and revenue growth of 68%. The stock is up 3.75% YTD and just broke resistance.
3. Rentech Nitrogen Partners, L.P. (NYSE:RNF)
Rentech Nitrogen Partners LP is a limited partnership formed by Rentech, a publicly traded provider of clean energy solutions and nitrogen fertilizer, to own, operate and grow nitrogen fertilizer business.
Rentech has a dividend yield of 6.54%, cash/total assets of 27%, year-over-year operating income growth of 242%, and revenue growth of 37%. The stock is up 109% YTD and looks like it may go higher.
Take a closer look at each of these stocks and determine for yourself if they are a good addition to your portfolio.
* Financial data provided by Morningstar.com
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.