CF Would Be An $80 Stock With Dividends In Place Of Buybacks

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About: CF Industries Holdings, Inc. (CF)
by: Sven Carlin
Summary

CF is a good business in a cyclical but stable industry.

The company is producing fertilizers but also high amounts of free cash flows.

Therefore, the biggest issue is capital allocation with the management preferring buybacks to other options.

CF Industries (CF) is one of the best fertilizer businesses out there. It takes advantage of low North American gas prices and of growing global demand for fertilizers. This enables the company to achieve high levels of free cash flow that should average above $1 billion per year in the future. It also implies a yield of above 10% on the current market cap of $9.5 billion. Shareholders should be happy, right?

Well, the issues boil down to capital allocation. Management has preferred buybacks, which didn't really add value over the last seven years. I argue that CF's stock would be trading around $80 if management simply renounced financial engineering and paid a dividend with the free cash flow.

Apart from the capital allocation, the business seems stable with the investing cycle coming to a peak. CF comes out as a winner from the tumultuous period fertilizer stocks had over the last five years compared to other fertilizer producers. I discussed K+S (OTCQX:KPLUY) as an example of a zombie company and a definite loser in the sector.

If you wish to know more about my reasoning, enjoy the podcast or video:

Video and podcast content:

  • 0:09 Fertilizer stocks comparison
  • 1:14 CF company overview
  • 1:49 Buybacks as main capital allocation
  • 3:09 Issuing shares and then buying them back
  • 3:40 Dividends in place of buybacks?
  • 4:28 Business cycle average
  • 5:34 Positive outlook

Video:

Podcast:

Disclosure: I/we 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. I have no business relationship with any company whose stock is mentioned in this article.