In fact, the company boasts several positives: a distinct advantage over peers with its zero-debt balance sheet, a variable-rate dividend policy and yields of more than 5% since 2011.
But is the yield sustainable? Let's take a closer look at whether this stock should be a part of a long-term portfolio.
Terra Nitrogen, a master limited partnership, has a prized nitrogen manufacturing facility in Verdigris, Okla., with the ability to produce annually 1.9 million tons (32% nitrogen basis) of urea ammonium nitrate solutions and 1.1 million tons of ammonia, the basic ingredient for most nitrogen fertilizers and several other industrial products.
All ammonia and UAN units at this facility are fully operational following a month-long outage.
The outages are an important element of the mix because Terra Nitrogen's dividend is a variable-rate scenario. It is required to distribute 100% of its available cash each quarter, as defined by the partnership contract, to unit holders and the general partner.
The quantity of obtainable cash is, therefore, contingent on, among other issues, Terra Nitrogen's profitability, working capital variations, capital spending and future money requirements.
And so, if the facility experiences any downtime, it isn't the greatest idea to try and pay out shareholders without significant cash flowing in.
But the stock is nevertheless a smart buy.
Terra Nitrogen has benefited from the shale gas revolution in the United States. Given this landscape and the highly cost-effective feedstock that gives the company a massive cost advantage over global suppliers, Terra Nitrogen is primed for growth.
With no debt, the stock is most certainly a very rare commodity, compared with chemical and minerals peers such as Ciner Resources ($110 million in debt), CVR Partners ($125.12 million), Incitec Pivot($1.99 billion), Israel Chemicals ($3.48 billion) and Westlake Chemical Partners ($384.1 million).
Thanks to its lack of debt, low-cost, raw-material advantage and solid management, Terra Nitrogen has delivered nearly $300 million to $500 million in annual free cash flow every year for the past half a decade.
The MLP's variable dividend rate policy has led to $300 million to $550 million worth of dividends paid every year between 2011 and 2015.
The trend should continue for the foreseeable future even as Terra Nitrogen hits the sweet spot and further reinforces itself financially.
With its free cash flow most years covering dividends, there is minimal risk in owning the stock as a high-income yield generator with a cost advantage and a hold on end markets.
The verdict? At an enterprise value to earnings before interest, depreciation, taxes and amortization ratio of 6.50 times, the $2.27 billion market value company is a solid investment, standing tall against competitors.
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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.