It always seems that some of the highest-dividend-yielding stocks are in businesses that operate in the background of our everyday lives, but generally go unnoticed. One of those companies is Rentech Nitrogen Partners (UNKNOWN:RNF.DL) -- not exactly a household name. What will get your attention, though, is that this company has an annualized dividend yield of 13.5%. Let's look at how Rentech Nitrogen can crank out this kind of yield, what might make that yield uncertain in the future, and whether Rentech Nitrogen is right for your investment portfolio.
Rentech Nitrogen 101
Rentech Nitrogen Partners is the master limited partnership subsidiary of Rentech (NASDAQ:RTK) that deals exclusively with manufacturing various nitrogen-based fertilizers such as urea, ammonium nitrate, and ammonium sulfate, which have various uses in agriculture and industry. Today, the economics of a U.S. fertilizer manufacturer that uses natural gas as a feedstock look very promising: The total demand for nitrogen fertilizer should remain strong for years, and domestic producers benefit from cheap natural gas.
One thing that yield-pursuing investors looking should keep in mind, though, is that Rentech Nitrogen is a variable rate MLP. This means the company's distribution will fluctuate from quarter to quarter as the company pays out 100% of its available cash to shareholders; no more, no less. While this might seem frustrating for investors, it is necessary because Rentech Nitrogen only operates two manufacturing facilities; if one of them were to go offline for an extended period of time, it would make paying a fixed distribution very challenging.
The big stain on Rentech Nitrogen's dividend
Rentech Nitrogen is almost like the tale of two factories. On one side is its urea and ammonium nitrate manufacturing facility in Illinois, which generates cash at a decent clip to fuel that dividend. On the other is the ammonium sulfate facility in Texas; this plant has done nothing but hemorrhage money since being acquired in 2012, and has not yet even generated a gross profit. Through September of this year, the facility in Illinois generated $1.61 in cash available for distribution per unit, while the Texas facility ate up $0.48 per unit.
The most discouraging part of the Texas facility's results is that on paper it looks like a great investment. It is North America's largest producer of ammonium sulfate -- a critical nitrogen fertilizer used for high pH soils -- and it has great access to domestic and international markets with a dedicated offloading facility in the Houston Ship Channel and rail service from multiple railways.
Despite these advantages, the feedstocks for this facility -- ammonia and sulfur -- and the transportation costs for these products have been so high that the company cannot sell for a profit. Management has said it plans to unveil a new strategy to make the facility profitable during the fourth quarter of this year, but results so far indicate it will be a daunting task.
Even if Rentech Nitrogen's Texas facility had just broken even in recent years, the distribution yield for this MLP would be much higher than it is today. Luckily, with its variable rate structure, the company has the flexibility to work through these issues without overcommitting to a fixed distribution and putting itself in position to fail. Still, there are other companies in the fertilizer space with high dividends that today look more attractive than Rentech Nitrogen Partners. However, if the company can control its costs at the Texas facility as it said it would in this quarter, then it might be worth reconsidering, because the economics for fertilizer look fantastic for many years -- and possibly decades -- into the future.