3 Bumper Dividend Stocks: Choose Wisely

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Who doesn’t like to see delectable dividends flowing into their bank accounts regularly, especially when they come from stocks belonging to a high-growth, high-resilience industry?

The fertilizer space is chock-a-bloc with such stocks, but there are three in particular that stand out for solid dividends. Yet, for those who think betting on a high-dividend yield stock is as safe as a brick (not for your head, of course), this article might just compel you to rethink.

Three super-dividend fertilizer stocks, yet all may not be fine beneath the surface. Which three, and why? Read along.

Terra Nitrogen (NYSE: TNH)
Terra Nitrogen enjoys the kind of "parental backing" not many do. 75% of it is owned by CF Industries (NYSE: CF), the largest North American nitrogen producer. It was only after acquiring Terra two years back that CF could attain this leadership position. Terra operates through one nitrogen facility at Oklahoma only; but being tied to CF, Terra’s performance doesn’t deviate much from its parent’s.  

In its last quarter, Terra’s sales slipped by around 1.5% because of lower prices and volumes. Yet, its net profit surged 20% thanks primarily to low prices of natural gas – a key input.  On a similar note, although CF’s second-quarter revenue was down 4% from the year-ago quarter, its bottom line rose 24% as costs reduced.

But don’t judge Terra on this. Its top line climbed a whopping 41.5% last year and gained 18% in the past twelve months. And its bottom line grew 91% and 40%, respectively, last year and in the past twelve months. The growth should continue as nitrogen remains the top fertilizer for crops and gas prices are still subdued.

CVR Partners (NYSE: UAN)
CVR entered the fertilizer race mid-last year when it was spun off from CVR Energy (NYSE: CVI) and listed separately. In its last quarter, CVR’s revenue remained flat year-on-year, while net profits slipped 8% as costs surged. What? Costs rose for a fertilizer company? Despite nat gas prices languishing at the bottom of the barrel? Yes, you heard it right.

The tragedy in CVR’s life is that the company unfortunately doesn’t use nat gas as feedstock. Instead, it relies on pet coke obtained from parent company CVR Energy’s adjacent refinery. So while others are dancing around the gas, CVR is feeling the heat.

Probably the only area where CVR might currently be better off than others is its strategic location in the U.S. Corn Belt and proximity to railroad major Union Pacific’s main line, which keeps it closer to farmers and help save transportation, freight and storage costs. 

So what is CVR busy doing these days? Expanding urea ammonium nitrate (UAN) capacity by 50% annually and targeting levels where 100% of ammonia produced can be converted to UAN. Despite recent flattish UAN prices, the move could be a game changer for CVR since the nutrient has historically demanded much higher premium to ammonia. And when a leader like CF also starts upgrading an additional 200,000 tons of ammonia to UAN per year, there must be something. 2013 will be a critical year for CVR when the project gets complete.

Rentech Nitrogen Partners (NYSE: RNF)
The youngest of the three, Rentech stands out because of its unbelievably handsome dividend yield of 14.2%. As for performance, not much can be gauged as the company started trading publicly only late last year. Its last-quarter performance was similar to Terra’s and CF’s – top line fell 5% as nutrient volumes and prices remained low, while net profits nearly tripled helped by low gas costs. For the first half of the year, Rentech’s gross profit margin came in at 63% compared to 48% a year ago.

Don’t think the new kid on the block isn’t growing. Rentech is expanding ammonia capacity, and aggressively ramping up production of a urea-based solution DEF that can reduce toxic vehicle emissions when injected in exhausts – a business area that definitely looks like a high-potential one.

Okay. What about dividends?
The common factor that ties all three companies is that they are structured as master limited partnerships, which enable them to pass on any taxable income directly to shareholders instead of paying income tax. Sounds good, right? But not when companies are paying out more than their cash flows warrant. That sadly seems to be the case with two of these.

<table> <tbody> <tr> <td><strong>Company</strong></td> <td><strong>Payout Ratio</strong></td> <td><strong>Free Cash Flow Payout Ratio</strong></td> <td><strong>Dividend Yield</strong></td> </tr> <tr> <td>CVR Partners</td> <td>117%</td> <td>267%</td> <td>9.3%</td> </tr> <tr> <td>Terra Nitrogen</td> <td>103%</td> <td>94%</td> <td>7.9%</td> </tr> <tr> <td>Rentech Nitrogen Partners</td> <td>140%</td> <td>186%</td> <td>14.2%</td> </tr> </tbody> </table>

Source: Yahoo! Finance, Morningstar, author’s own calculation

Mind-boggling figures, right? Rentech and CVR look scary (note that since Rentech has paid out dividends only twice, metrics for the company have been calculated based on the numbers available for previous two quarters).

Though not much can be said about what the trend at Rentech is like in terms of earnings or dividends, figures above show how the company is paying out nearly double its current free cash flows, which isn’t a great sign. Because what it means is this – in a bid to keep dividends high, Rentech is using up the cash it generated from its initial public offering proceeds and from the debt it raised some time back. Quite obviously, dividends paid out of such sources can’t be sustainable. Debt on books also means increased interest burden. So unless the company starts generating higher cash flows, one cannot rule out the possibility of a dividend cut in the future as liabilities grow. The situation is pretty much the same at CVR. Only Terra’s levels provide some comfort.

The takeaway
Clearly, running after eye-popping dividend yields might not be prudent unless one checks the underlying fundamentals. Rentech also seems too pricey, trading at a P/E of 16.7 times. Both CVR and Terra are trading at roughly 13 times trailing earnings.

Do the math, and then decide. After all, it’s your hard-earned money. Invest wise, and stay Foolish!

Neha Chamaria has no positions in the stocks mentioned above. The Motley Fool owns shares of CF Industries Holdings. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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