I’ve followed the agricultural industry closely for years now as it remains one of my favorite long-term investment themes and I think the fundamentals are setting up nicely to see things begin to improve for related companies in 2015 and beyond so I recently added a new position in Terra Nitrogen Co (TNH), a maker of nitrogen based fertilizers used by farmers.
Terra Nitrogen is not your typical stock though. It has a unique structure in that the shares are actually units of a Limited Partnership, with the Master Partner being owned by CF Indsustries (CF). Under this structure, its sole purpose is to pass-through all profits (except the money needed to maintain operations over the next year) to the unit holders. Approximately 40% to 45% of distributable profits go to CF and the remaining 55% to 60% is paid out to unit holders of TNH (that’s us).
The company has no long-term debt making it basically a cash-flow machine driven by the annual dividend. The stock price fluctuates over time to adjust the expected dividend yield according to market rates to maintain approximately a 7% to 9% dividend yield (as risk premiums fluctuate). As the price for fertilizer drops, profits (the distributable dividend) drop and thus the price of TNH falls to adjust the yield. The goal is to catch TNH near the bottom of this cycle where fertilizer prices/volume should, at a minimum, stabilize and hopefully begin to pick-up.
Terra Nitrogen’s two main products are Ammonia and Urea Ammonium Nitrate (UAN), both of which contain high concentrations of Nitrogen with a major input being natural gas. Over the last year and a half, we’ve seen prices for Ammonia and UAN drop while the price of natural gas has risen, both squeezing TNH’s profit margin, sending the stock much lower. My research tells me it’s worth stepping in here to begin buying. On a worst case scenario this year, I think we could see TNH move lower to about $110, but I think the probability is very low and I would welcome the drop. If it continues lower, I will be aggressively buying more. In the meantime, we’ll collect approximately a 7% yield while we wait.
Terra Nitrogen (TNH) – 2 years, weekly
Terra Nitrogen (TNH) – 5 years, weekly
Thanks for following!
-Nick
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