Good dividend, good sector, not expensive, no debt, cash-flow generating. What’s not to like? Well, it’s approaching overbought levels and since stock prices in this sector can be a bit volatile, you might wanna wait a little…
A Better Way to Invest in Fertilizers: Terra Nitrogen
Fertilizer companies have shown promise to investors because of their indirect benefit from increasing prices of agricultural products. However, this sector has been rocky and volatile and price movement often does not directly match the growth of farm production or agriculture prices. A possible alternative to traditional fertilizer names such as Potash (POT), Agrium (AGU) and Mosaic (MOS) is Terra Nitrogen (TNH). Terra Nitrogen is a good investment because of its high direct returns to investors, it’s production of ammonia, and its declining costs of business allows for increased margins.
Terra Nitrogen is a subsidiary of Terra Industries that is the fourth largest nitrogen producer in the United States. They specialize in producing ammonia, which is a critical ingredient for fertilizers. Nitrogen is critical to plant growth and there are no proven substitutes for nitrogen as an ingredient for high crop yield fertilizers. In addition, nitrogen products must be reapplied on an annual basis to keep the soil fresh, thus creating a consistent stream of demand by farmers.
Financially, Terra Nitrogen pays out handsomely to its investors. First, they have a high dividend yield of 8.58%. The company also has no debt and earnings have grown 22% on average over the past five years. Management is very efficient and it shows with a 95% return on equity and an astonishing 123% return on investment capital. Insiders are confident about the company’s prospects as well owning 51% of the shares directly.
Unlike other major companies that have input costs rising, Terra Nitrogen’s costs are falling due to the excess supply of natural gas. Fifty percent of the company’s production costs come from buying natural gas. Since 2008, the price of natural gas has declined from $14 to $4 per MMBTU. With the plenty of supply coming from American shale formations, natural gas is not expected to rise in price any time soon. On the other hand, other commodity prices are skyrocketing which will raise production costs for the rest of the market.
Overall, I think that Terra Nitrogen along with Potash are the two best ways to profit off the rise in food prices. Although right now the company looks a little overbought technically, I plan on entering the stock in a few weeks when a pull back is expected to occur and plan on holding for long term (when real interest rates become positive).
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Some additional research
- Those quarterly dividend pay-outs sure are nice..
- The stock is less volatile and cheaper than the sector (on earnings/cash-flow basis, not on sales). Much better margins, higher growth and dividends are main explanations of this
The graph below is self updating