When searching for dividend stocks that will provide a steady stream of income throughout the year, it's important to look beyond the yield reported on financial dashboards. Why? A high yield stock doesn't necessarily make a slam dunk investment, especially if the dividend or distribution isn't sustainable. Unfortunately, investors can learn that reality the hard way if master limited partnerships are the stock of choice, which often have variable (and sometimes volatile) distributions each quarter.
Take nitrogen fertilizer specialist CVR Partners LP (UAN -1.46%) as the perfect example. The company splashed onto the scene in 2011 and quickly persuaded investors with its high yield and plans for growth. However, despite originally guiding for an annual distribution range of $2.15 to $2.45 per share in 2013, several setbacks during an expansion project at the company's lone production facility resulted in an annual distribution of $1.983 per share. Things have never quite been the same since then -- as the share price chart demonstrates.
Then again, the current double-digit yield may be enticing.
A look at CVR Partners
|
Fiscal Year |
Fiscal Year Distribution Per Share |
|---|---|
|
2014 |
$0.71* |
|
2013 |
$1.983 |
|
2012 |
$1.811 |
*Distribution through 1H14. Source: CVR Partners
What's wrong with CVR Partners LP?
On paper, CVR Partners LP has many positives. It utilizes petroleum coke, rather than natural gas, as its primary feedstock, which should help it maintain margins and outperform competitors as natural gas prices edge higher and petroleum prices plunge. It's located close to America's breadbasket, which gives it a cost advantage in freight and shipping expenses compared to Caribbean peers. And upgrades completed in 2013 allow the company to produce substantially higher volumes of higher margin products.
Everything is in place for the company to succeed, but variables outside of management's control have weighed on recent performance. The main culprit is lower average selling prices for nitrogen fertilizers such as ammonia and urea ammonium nitrate, or UAN. Falling market prices this year compared to the year ago period have resulted in lower sales despite increased production, lower feedstock prices, and less facility downtime. Increased operating expenses for rail car shipments in 1H14 have caused a similar unraveling of net income.
And, of course, lower income means less cash available for distributions. Consider that the company's first half distribution of $0.71 per share this year is 40% and 37% lower than the distribution through the first half of 2013 and 2012, respectively. No wonder the stock has lost nearly 40% of its value since the distribution made during the second quarter of last year. It certainly doesn't look very good for CVR Partners in the near-term, but that's mostly due to lower market prices and higher shipping costs -- both out of management's control.
What should investors expect from this high yield stock?
If you want to take the long, optimistic view of the company's distribution, then you'll be encouraged that management is focused on growth opportunities and high-margin products. The company will have to weather the storm with quarterly operating margins of only 25% until the cyclical fertilizer market swings back around. When it does, the compounded quarterly yield realized by investors courageous enough to purchase shares at $12 will be rewarded.
Unfortunately, no one knows when the cycle will accommodate growth for the industry and support higher operating margins. Given the volatile quarter-to-quarter changes in distribution and the fact that CVR Partners operates a single manufacturing facility, you may want to look elsewhere for a less risky high yield stock.
