One Huge Dividend Play

In my Special Situations portfolio, I look for catalysts that can drive a stock's price. One more predictable type of situations relates to dividends, as I outline in "5 Surprising and Special Dividend Stocks." So I'm back with another company whose fat yield looks like it might drive the stock price higher. That business is CVR Partners (NYSE: UAN  ) , a limited partnership that held its IPO less than two weeks ago. The limited partnership was created by parent CVR Energy, which still retains more than a 70% interest in this $540 million company.

CVR Partners owns and operates a nitrogen fertilizer business based in Coffeyville, Kansas. According to the company, it's the only nitrogen fertilizer manufacturing operation in North America that uses a petroleum coke gasification process to produce its fertilizer. The company is moving ahead with a two-year plant expansion that will increase its production of urea ammonium nitrate by 50% per year. The company also produces lower-margin ammonia.

CVR Partners sells its products primarily in the higher-margin agricultural market, whereas competitors such as PotashCorp (NYSE: POT  ) , Agrium, and Yara make substantial sales of non-nitrogen fertilizers to the lower-margin industrial sector. Because nitrogen must be added to crops each year, such fertilizers provide more stable demand relative to other key nutrients such as potassium and phosphate.

Still, the company does appear to have a cost advantage in its operations -- a key consideration for a commodities-type business. First, its location in America's heartland puts it close to agricultural consumers, giving CVR a transportation cost advantage and allowing it to sell into this higher-margin market.

Second, the company's use of petroleum coke gasification gives it a price advantage over competitors, virtually all of which use natural-gas-based methods. CVR Partners reports that its costs are "79% fixed and relatively stable." And as natural gas prices rise, the company gains a further advantage over rivals, whose production costs are 85%-90% based on natural gas.

And then there's that distribution...
What drew my attention was the company's estimated distribution for the upcoming year of $1.92 per share. At yesterday's closing price of $17.93, that would be an estimated yield of about 10.7%. That figure clearly surpasses others in the publicly traded partnership space.

Company

TTM Yield

Distributions per share

Terra Nitrogen LP (NYSE: TNH  ) 5.0% $5.44
Inergy LP (NYSE: NRGY  ) 7.1% $2.37
Buckeye Partners LP (NYSE: BPL  ) 6.4% $3.88
Linn Energy LP (Nasdaq: LINE  ) 6.8% $2.58
Penn Virginia Resource Partners LP  (NYSE: PVR  ) 6.9% $1.56
Average 6.4%  

Source: Capital IQ, a division of Standard & Poor's. 

So, based on other publicly traded partnerships, it looks like an average yield is in the mid-sixes. Giving a comparable yield to CVR Partners puts shares at $29 to $31 -- or up 65% at the midpoint of the range. The company intends to pay out all available cash it generates each quarter, with the general partner having a non-economic interest and not being entitled to cash distributions. Now that looks pretty tempting ... but is it?

Well, the company provides several caveats on its payouts in its prospectus:

  • "Unlike most publicly traded partnerships, we will not have a minimum quarterly distribution or employ structures intended to consistently maintain or increase distributions over time." (p. 19)
  • "Investors who are looking for an investment that will pay regular and predictable quarterly distributions should not invest in our common units. We expect our business performance will be more seasonal and volatile." (p. 19)
  • "Our partnership agreement does not require us to make any distributions at all. Accordingly, investors are cautioned not to place undue reliance on the permanence of such a policy in making an investment decision." (p. 19)

So CVR Partners states up front that shares will likely be volatile due to the nature of the industry and management's own distribution policies. And if the dividend is below the market's expectations, you can expect shares to drop, too. With the company paying out all its cash, where do you think money for expansion will come from? Issuing more shares, of course, as is typical for limited partnerships.

Foolish bottom line
With a yield that's more than 10% at current prices, the shares probably have room to move to reach yields that are more comparable to other publicly traded partnerships. But given its dividend policy, CVR Partners might not be for everyone, especially income investors who need rock-solid and growing dividends quarter after quarter.

For those who demand such stable payouts, I invite you to take a look at 13 other dividend stocks in a free report from The Motley Fool called "13 High-Yielding Stocks to Buy Today." Hundreds of thousands have requested access to this special free report, and now you can access it today at no cost. To get instant access to the names of these 13 high yielders, simply click here -- it's free.

Jim Royal, Ph.D., does not own shares of any company mentioned. 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.


Read/Post Comments (41) | Recommend This Article (137)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 19, 2011, at 5:53 PM, pastreet wrote:

    Good list, but I also like some of the better known companies like PFE and T for dividend plays.

    Pat

    www.compoundingreturns.com

  • Report this Comment On April 19, 2011, at 6:06 PM, buddylady wrote:

    Re: "Six Stocks you can't afford not to own"

    Why the " Hide and go seek" following clicking onto several of you offers or invitations to review.

    In the case, where are the Six investments you are referring to? Let's start making it a bit more clear for you subscription holders.

    Bill Newnam

  • Report this Comment On April 19, 2011, at 6:17 PM, dustbyn wrote:

    I agree with Bill, as a subscriber I should not see the 42,000 sub offers with every email. It is so over the top, I am sure it turns off more people than a normal straightforward offer. If the value is there, people who are smart enough to see it won't need fifty steps with come-ons to sign up.

  • Report this Comment On April 19, 2011, at 6:40 PM, LakeJuJu wrote:

    I agree with above comments. I wish an article would just state a great buy....or not!

    That way we wouldn't have to study more articles.

    Judi Denard

  • Report this Comment On April 19, 2011, at 6:48 PM, Sally5kmom wrote:

    I agree we are already subscription members.

  • Report this Comment On April 19, 2011, at 9:07 PM, Davemuse wrote:

    Jim, if CVR Partners is such a good opportunity, why didn't you explain what holds for the company post the big dividend, particularly given the caveats offered by the company?

    Dave Carlson

  • Report this Comment On April 19, 2011, at 9:56 PM, matthewbanis wrote:

    Glad to read about a unpredictable dividend, ie. A waste of time.

  • Report this Comment On April 19, 2011, at 10:05 PM, energysystems wrote:

    Not a waste of time...the company gets the petrol coke for 0$. They don't pay a dime for it. It's a profitable turn on a waste product of their main business. The bigger their petrol refining biz grows, the bigger their fert biz will get. While I'm certainly not a fan of the dividend caveats, nor does it instill confidence in the divi, the underlying business is genius. Fert businesses have been blowing through the ceiling as of late. I think I'll be adding a small position as a spec play.

  • Report this Comment On April 20, 2011, at 12:18 AM, TMFRoyal wrote:

    Hi, Dave,

    I tried to sketch out some of the relevant factors affecting the company for a longer period after the dividend. So I touched on the seasonality of the business, the volatility of fertilizer prices, the company's fixed input costs, and some inherent competitive advantages such as its geographic proximity to its consumers and therefore the company's ability to sell its higher-margins products. Those are all factors (many positive) affecting the company's longer-term prospects post-divvie.

    The dividend should be paid out over four quarters, and there's no reason to believe this is simply a one-and-done type of thing like a special one-off divvie. But it's important to note that there are risks to this investment (as there are in all investments) and it's important not to ignore them. I have no special insight into how management intends to run its cash policies, other than what the company is compelled to reveal in the prospectus and the caveats that I mentioned above. But a dividend-paying company that treats shareholders poorly by suspending or slashing the payout willy-nilly also finds it more difficult to raise money, as publicly traded partnerships are wont to do when they want to expand.

    Foolish Best,

    Jim

  • Report this Comment On April 21, 2011, at 4:53 PM, FarmGranny wrote:

    The older I get the smarter I’m Not. When I read what the company made its fertilizer from, “petroleum coke” gasification (process), I had to look it up. Wikipedia went over several ways that waste from the oil industry is made “palatable” but really. I don’t’ think putting this on my fields and giving the food that grows there to farm animals or humans really sounds like a good idea. Just planting some legumes does a better job. I think we fools might consider healthier money. I am a bit green I know! Think About it Please.

  • Report this Comment On April 22, 2011, at 11:02 AM, PeakOilBill wrote:

    How much debt do these high yielding companies have, and how will rising interest rates impact them?

  • Report this Comment On April 22, 2011, at 12:06 PM, GreenlakeMer wrote:

    @FarmGranny: I thought the same thing! Not only about the petroleum, but about chemical fertilizers in general. I have a tough time investing $$ into a business that I don't ethically support. Thanks for speaking up!

  • Report this Comment On April 22, 2011, at 12:35 PM, Truth2Power wrote:

    Hey energysystems,

    How did you find out that "the company gets the petrol coke for $0"? I mean, I get that they probably procure it from CVR Energy, but I can't imagine that there isn't some sort of price volatility/fluctuation in there somewhere...

  • Report this Comment On April 22, 2011, at 12:38 PM, geor8ge wrote:

    I agree with Bill and dustbyn: I just want information not sales pitches . This is why I recently canceled my subscription and have been looking to Morningstar and other information providers.

  • Report this Comment On April 22, 2011, at 12:49 PM, verylargelarry wrote:

    People, get over it. The Fool is in the business of selling subscriptions. If you don't understand that, you should not be looking for investing advice anywhere.

  • Report this Comment On April 22, 2011, at 1:13 PM, fusil5 wrote:

    Fools,

    Please stop with the childs play in giving us PAYING subscribers the information right up front. We are for the most part very busy people and bussines owners.

    These bs e-mails were we need to clcik 4000 links to find what we need is going to impact your bottom line in the future.

    We are adults so stop with the forced advertising and wishsy washy banter.

    We need facts and key finicil information in the easiest visual way possible.

    Please, Please Please knock it off.

    Thanks

    Al

  • Report this Comment On April 22, 2011, at 1:42 PM, whyaduck1128 wrote:

    I'm a tax professional, and I know a rat when I smell it. I smell a rat in these LPs. Sure, you get a "high yield" in terms of cash for your investment, but what they're paying you is largely (or exclusively) YOUR OWN MONEY.

    What you receive is not necessarily what you pay taxes on, as the taxable amount is unknown until you get a K-1 at the end of the year. You may pay tax on less than what you receive, but guess what? It's also reducing your basis!

    And if the K-1 shows a loss, most of the time (all if it's a publicly traded partnership, or PTP) you can't take the loss right away; it's suspended until it's offset by profits, you sell it, or it's terminated.

    Let's say you invest $20,000 and receive $1,500 during the year, a supposed yield of 7.5%. With a stock yielding that much, you have $1500 income and a basis of $20,000. With a LP, you have zero income (or very little, depending on the K-1 numbers) and a basis of $18,500.

    This doesn't even consider that I've rarely seen anyone sell one of these things at a gain, even above the reduced basis. Or that your tax professional hates the complexity of these things and will charge you more for your return.

    Personally, I'll take the stock. Neat, clean, simple, and at least 90% of the time, what you get is what is taxed.

    Your mileage may vary.

  • Report this Comment On April 22, 2011, at 1:54 PM, radicalaccountin wrote:

    This is terrible for the earth! It poisons the soil and your food. Meanwhile, we're wasting what the soil (plants) needs to thrive, like compost, manure. What a pity.

  • Report this Comment On April 22, 2011, at 1:58 PM, CraigGilkison wrote:

    This is news?

    I can up with three that pay 10% or more off the top of my head, CIM, DX, GAB. They are in my protfolio. There are many others.

  • Report this Comment On April 22, 2011, at 2:38 PM, TadpolesUS wrote:

    CVR's fertilizer plant depends on its cheap feedstock from the Coffeyville Refinery. I would rather not gamble on the future viability of a marginally-competitive oil refinery.

  • Report this Comment On April 22, 2011, at 2:44 PM, darvant wrote:

    Fine dividend play for now and next couple of years? But caution beckons...

    So when will hybrid corn be perfected that requires no in-field nitrogen application? The genius scientists are coming close at this time. It sure would be a miracle to get the chemical toxins (including liquid nitrogen) out of our fields, and out of our foods.

  • Report this Comment On April 22, 2011, at 2:51 PM, keninden wrote:

    Thanks, Jim. Interesting idea.

    But there are some interesting things to consider with an MLP: it does not pay taxes, so the shareholder (partner) is liable for taxes on the MLP's income. Most of the distribution goes to reducing the basis (record-keeping nuisance here), but 10-20% is taxed as ordinary income to the shareholder. If you hold on for a long time, and your basis falls to zero, all distributions are taxed as ordinary income.

    Its not a good IRA investment because you lose the income tax advantage (distributions mostly taxed as capital gains when you sell), and some of the distributions are income which will be taxed even if kept in an IRA. I suspect the income portion of the distribution will also be counted as a contribution.

    If you receive too much in distributions, you can be saddled with filling out multiple state income tax forms. whyaduck1128 would know a lot more than me about the threshold of income that triggers this.

    The K-1's that partnerships put out are notoriously late, greatly annoying my tax accountant this year.

    The nitrogen runoff certainly does damage our rivers and the Gulf of Mexico, creating a large "dead zone" in the latter. But owning these shares or not will not impact that reality. Environmental protection happens elsewhere.

    The dividend warning isn't alarming - I had some nice, safe banks in my portfolio a few years ago and their dividend disappeared with no warning!

  • Report this Comment On April 22, 2011, at 3:00 PM, breivog wrote:

    Seems risky when there are other dividend stocks available paying similar levels, with good track records. I like Telstra (the Australian telcom, TLSYY), which pays 9%. Annaly and Hatteras financial also pay close to 15%.

  • Report this Comment On April 22, 2011, at 4:09 PM, 716625fool wrote:

    I believe that the k-1 loss on these is a passive loss. If there is other passive income I think the loss can be deducted in the same year.

    HG

  • Report this Comment On April 22, 2011, at 4:17 PM, dolly66s wrote:

    Better get your facts straight..........UAN DOES NOT pay a dividend. What in the world are they saying.......UAN is a great dividend play???????

  • Report this Comment On April 22, 2011, at 7:11 PM, vaidybala wrote:

    UAN should be YPAY. Why beat about the bush? Dividend Risk very high. Go elsewhere for steady income!

  • Report this Comment On April 22, 2011, at 8:42 PM, Chippy55 wrote:

    What am I missing here? UAN closed at 18.99, and Yahoo shows the Div and Yiled as N/A> So where does the $1.92 figure come from?

  • Report this Comment On April 23, 2011, at 9:11 AM, mfarm9 wrote:

    For those of you who are interested, here's info on the fertilizer business from the CVR Energy 2010 financials:

    Nitrogen Fertilizers - For the year, the nitrogen fertilizers business reported operating income of

    $20.4 million on net sales of $180.5 million. Adjusted EBITDA for the fertilizer segment during the year amounted to $52.8 million. We achieved these annual results despite a planned turnaround and an equipment outage that limited operations in our urea ammonium nitrate (UAN) plant in the fourth quarter. In 2010, we produced 392,700 tons of ammonia, of which 237,100 tons of ammonia were converted into 578,300 tons of UAN. That left 155,600 tons of ammonia available for sale. This is a larger proportion of ammonia available for sale than we have produced in recent years, caused by the fourth quarter

    incident at the UAN plant. Higher than anticipated ammonia prices in the fourth quarter largely offset

    the loss of UAN sales.

    After the turnaround and completion of UAN plant repairs in November, the nitrogen fertilizer plant

    returned to service and has run very well since repair. We expect operations to remain highly reliable, as our past history would indicate. In addition, some of the retained cash from this year’s initial public offering of CVR Partners, LP, which holds our nitrogen fertilizer assets, will be used to expand the UAN plant’s capacity from 650,000 tons per year to more than 1 million tons per year.

    So, there you have it. It helps to have some historical info on performance.

  • Report this Comment On April 23, 2011, at 12:02 PM, TMFRoyal wrote:

    vaderviper,

    All my information comes straight from the company's pre-IPO filing. As I explain in the article above, the company has just gone public, and many finance sites do not report its dividend, since it hasn't paid one yet. As I note, the company estimates its forward payout at $1.92 per share.

    Jim

  • Report this Comment On April 23, 2011, at 1:24 PM, whyaduck1128 wrote:

    keninden,

    Generally, "foreign states" (those in which one is a non-resident) don't come looking for taxes unless there's large reportable income. It's just not worth it for (to pick one) Oklahoma to spend time looking for taxes on $1,000 of income, even if your federal Adjust Gross Income is over $250,000. At most, they'd get their top rate on that thousand. However, if they did, you'd usually get a credit on your home state return, limited to how much you paid Oklahoma.

    There are two exceptions. One is a state that's desperate for cash. California comes to mind. They're going after anyone who has income even tangentially related to the state. For example, I have a client who's a self-employed lawyer, doing some work here for clients here, paid via a law firm in LA. Even though he doesn't live in CA, doesn't work in CA, and his clients aren't in CA, the Cali tax folks are looking for some dough. (Good luck with that, California FTB!)

    The other exception is if you live in a state that doesn't have a personal income tax, Texas and Florida being the largest. States with a tax may want some dough, and legally they're entitled to it. It all comes down to whether there is in fact any income taxable, and in cases such as the MLPs, the answer, after slogging through the K'1s and their accompanying, stupifying complicated and dull attachments, is usually "no".

    Good luck getting your accountant to do all that work for free!

    IMO you're better off going for relatively high-yielding stocks, where the income is WYGIWYPTO (what you get is what you pay taxes on) and your accountant (or you, if you do your own) spends about 15 seconds entering vs. ten minutes to a half hour trying to understand the K-1.

  • Report this Comment On April 24, 2011, at 10:57 AM, JackLaw wrote:

    I likewise hate the reading and searching I have to do to get to the point and sometimes you get to the bottom and find you have to go somewhere else for the info promised.

    We are paying subscribers and will not tolerate this waste our time.

    We will just leave.

  • Report this Comment On April 24, 2011, at 11:09 AM, CromulentBrad wrote:

    it's amazing, really. most of you "experts" posting, myself included, couldn't identify petroleum coke gasification if it bit us on the butt.

    every credible investor i admire tells me to stay away from things i don't understand. upside or not, i'm taking uan off of my watch list.

    as i watch my sweet doggie sleep in the sunlight, it reminds me i should do a little less research on coal ash and more on petsmart.

  • Report this Comment On April 24, 2011, at 5:08 PM, phoebe44 wrote:

    For all you "paying subscribers" bellyaching - quit reading the free newsletters then - that's what these are - I'm a subscriber, too, and smart enough to know the difference between a free newsletter that pitches the premium services and the premium services newsletters I pay for.

    For goodness sakes - do you see the advertising pitches in our premium newsletters - Nooooo!

    Now, either take the free newsletters for what they are or stop reading them -- you are clogging up the comments section. Geez!

  • Report this Comment On April 24, 2011, at 7:39 PM, dave22q wrote:

    thanks fellow fools. what seemed a marginal idea is demonstrably a lousy one. while gas is way too cheap vs oil nobody addressed wh

    .at the near sure b$20 drop in oil while gas holds will do to this turkey. but that is just fertilizing the manure pile.

  • Report this Comment On April 24, 2011, at 8:45 PM, dillon53 wrote:

    phoebe44, loved your comment. It took me a long time to realize that if I followed recommendations beyond my paid subscription, I'd end up having to subscribe to additional services to stay up to date with those investments. That isn't to say that I don't enjoy the info provided in the various newsletters, but it gets too expensive for me to subscribe to more than I already subscribe to.

    Anand, returning to your article, I, too, believe that a company producing something very simple, basic, and needed by everybody for decades to come is the way to go, with dividends playing an important part. But why not take the guess out of the equation? Coca-Cola, Microsoft, software in general, oil, etc. . . let them be gone whenever. The one product everybody will still need is WATER, that is, water treatment plants. It's the dividend-paying investment of a lifetime for all generations to come. Our great-great-great . . .grandkids will thanks us. All other products might be replaced by other products and ever newer companies. Water not.

  • Report this Comment On April 25, 2011, at 7:24 PM, dillon53 wrote:

    Sorry, Jim, for mixing up names here. I think I read an article by Anand on the same or similar subject.

  • Report this Comment On April 28, 2011, at 1:10 AM, blaueskobalt wrote:

    I think there might be some erroneous link at work here. Well more than half the comments don't seem to relate to the article.

    Great column, Jim! I have been following your special sitch portfolio since rising stars started, and I think this may be your best find yet. After finishing my own DD, I think that the parent CVI might be the better play here, given the upside on the refinery end. Getting at the proforma numbers requires a bit of guesswork, but if I am right the refining business of CVI is growing fast and trading at a trailing 5x EV/EBITDA after you back out the 70% stake in UAN. With the Brent-WTI spread these days and the operational improvements at CVI, I think there is a lot of upside to the refining EBITDA also. Third Point seems to agree, too. Lastly, I don't that you noted the $5M in UAN units that CVR's management team bought out of pocket at the IPO. This has Greenblatt written all over it.

    Keep up the good work!

    -Sean

  • Report this Comment On April 28, 2011, at 9:55 AM, ratshaman wrote:

    I can see a big advantage to investors who understand chemistry, biology, and agriculture, when investing in same.

  • Report this Comment On April 30, 2011, at 10:14 AM, Roofus26 wrote:

    Hi, Jim,

    Your posting on UAN is very interesting, and I bought - into my IRA, thinking that big dividends would be good there. Is it true that I will be taxed for UAN gains and possibly UAN dividends in my IRA? Thank you for giving this pertinent information.

  • Report this Comment On May 01, 2011, at 5:44 PM, TominTexas wrote:

    Roofus, I believe UAN is like all LP's in that you usually have no tax liability for distributions (or gains) in an IRA.

    What you lose by having an LP in an IRA is the tax sheltering that you could have had in a taxable account.

    In a taxable account you do not pay taxes on the LP distributions till the stock is sold.

    In your IRA you can sell the LP and taxes are due (usually) only when you take a distribution from your IRA.

    BTW, I have UAN and other LP's in my IRA.

  • Report this Comment On May 02, 2011, at 11:23 AM, mas113m wrote:

    From CVR's Website:

    Cash Distributions

    It is the policy of the Board of Directors of the general partner of CVR Partners to pay quarterly cash distributions of all the Partnership’s available cash, as determined by the Board of Directors, to its unitholders.

    I'll take the offer of "all available cash". They also state that they are a growth oriented partnership, so that will take priority over distributions, but I still feel they will be fine.

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