Terra Nitrogen: A High Yield Ag Stock to Sink Your Teeth Into

In my recent series of articles highlighting high yield stocks without the false/at-risk dividend rate of falling financial stocks, I want to highlight an agricultural up and comer yielding 12% (perhaps heading a bit lower in the future though...read on).

Terra Nitrogen (TNH) produces and distributes nitrogen fertilizer products for use in both agricultural and industrial markets. Its nitrogen product includes anhydrous ammonia, a form of nitrogen fertilizer and other nitrogen fertilizers, such as urea ammonium nitrate solutions. Its primary market is within the United States.

The stock has a relatively high Beta at 2.2%, but not surprising given the volatility in commodities markets and its fast-mover status. The short float was showing at 9% at the end of May, which is also a slight concern, but not out of the ordinary given its run and speculation in commodities stocks (some stocks are several times that and still continue to run on short selling or old fashioned fundamentals).

A review of Terra's Balance Sheet tells a nice story. From the years ended 2006 to 2007, Terra's cash position increased substantially, while showing no debt going back years. It's rare that a company goes completely debt free given the tax shield provided by optimizing your weighted average cost of capital, but apparently, the company has found it has more cash on hand than it needs, so it is paying it out in the form of dividends and taking on no new debt.

 

Terra's Accounts Receivables have not increased at an alarming rate and it was able to draw down inventory year over year.; so no writeoffs/writedowns coming as a surprise. Cash flow from Operating Activities far outpaced outgoing cash flows from Investing and Financing Activities. It looks pretty clean; much cleaner than say, a typical Financial or REIT with a similar yield and much greater risk.

The dividends have increased significantly in recent years, in line with its share price. As long as food complex remains constrained and fertilizers are in increasing demand, it is unlikely that earnings will decrease substantially in the near term. When considering the ethanol mandates, flooding in the plains and overall increasing food prices, perhaps some of these factors are priced in, but a fundamental change in the demand for Terra Nitrogen's products seems unlikely.

 

At a minimum, if investors sense a peak in growth, Terra can continue to pay out a hefty dividend, which will also provide support as investors sense a dividend that is too appealing to pass on...BUT...

Dividend Cut Coming? And How to Play It.
I did come across one interesting article by a fellow contributor at SeekingAlpha where the author performed some calculations showing that the dividend may decrease to roughly 8% per year given a partnership agreement signed with the parent company, Terra Industries (TRA). This has yet to play out on how it will affect the dividend, specifically due some ambiguity in the disclosure, but it appears to have been priced into the stock, as I'm sure it's not a complete secret to institutional holders.

So, how to play this uncertainty in the next dividend payout? Given some articles out there highlighting TNH's juicy yield, while omitting the partnership agreement impact (recent one here that from Yahoo!Finance), there will likely continue to be individual investors piling in. When the distribution is announced, there will likely be some surprised and angry investors expecting to see something in the high $4 range, but instead, shocked by an announced dividend of say, $2.57 (according some author's calculations and corroborated by some additional insiders at SeekingAlpha).

 

So, this might be a bit imaginative, but I could see this scenario playing out this way: The day of the distribution announcement may be an opportune time to purchase shares following this dip. Holders will be dumping the stock trying to figure out why the dividend was cut, what will happen to future dividends, why everyone else is selling, etc. You can pick up a quality stock with what will then be an 8% or higher dividend and then ride the stock back up when normalcy sets in.

On the topic, you may also want to consider Terra Industries (TRA), the parent company. Over most time periods, the stock has outperformed (note an 800% gain over the past 2 years vs. 500% for TNH), but without the dividends. Granted, the dividend pales in comparison to the past capital appreciation, but that's no guarantee moving forward.

Disclosure: The author has no position in any investments mentioned in this article.

Comments

[zip05751]

TRA will declare a dividend in the July/August time frame.

[garlicbulb]

A couple of comments here.

Nitrogen fertilizer products have to be manufactured. This is usually done using natural gas so there are increasing costs in production.

Sales are mostly in North America and thus can be more seasonal than other fertilizer plays

[johnthebear]

I had TNH, but because of comments in Alpha leading me to the conclusion that the dividend will be cut, I sold and invested in TRA which has a very low dividend up till now.

Since TRA owns 75% of TNH, then all the revenue that had been flowing out to TNH should be retained by TRA and distributed to the parent company.

Please, if you know more about the company dividend plans, let us know. For now TRA is in a great position to grow with a 18 pe vs 50+ pe for POT. This ag play is one of the

[fireball]

there was a very similar article last time on the dividend payout. the dividend came and it was not reduced.

[fireball]

hey johnthebear i have been thinking about your concern. last quarter there was an article that was much more impressive with facts and figures and it appeared to be quite knowledgable. i almost sold tnh because of it. tnh was going to cut the div. by half and maybe even 75%. it was all about how tra would get all the money. it did not happen. maybe the author had a wife or brother who was short. according to this sight rf was going to cut their dividend long ago. it may happen but not yet unless it happened today. i do not think tra wants tnh to take a hard drop. it could happen but at least look in to the mvis fiasco created by an author on this site. there is not accountability here. i still look and consider what is said because even unreliable press is press. if i was not already a holder of tnh and wanted in i would at least consider it today. i did jump on some pricey companies this morning while they were down. i do own tnh, rf and mvis. good luck jtb

[Everyday Finance]

Sorry guys, nothing as elaborate as a wife that's short or anything like that. I have no position either way in TRA or TNH, now does anyone that I know. The next dividend should be declared in the coming weeks; will be interesting to watch.

Note that since the post, as I recommended checking out the parent TRA, we've seen TRA up over 10% while TNH has lost close to 15%. Almost a 25% spread! S&P lost 5% during this period.

So, you would have done OK checking out TRA per the last PP.