Terra Nitrogen will become a high dividend stock during pullbacks. TNH Basic Financial Metrics.

Terra Nitrogen (TNH) Basic Financial Metrics.  Buy Terra Nitrogen on stock market corrections that make this stock yield more than 6% again.  This stock has strong basic financial metrics that will improve even more on pullbacks.

Disclosure: I do not own Terra Nitrogen stock.

Terra Nitrogen Company, L.P. (TNCLP) is a Master Limited Partnership consisting of one nitrogen manufacturing facility in Verdigris, Oklahoma, and terminal operations in Blair, Nebraska and Pekin, Illinois. TNCLP’s New York Stock Exchange ticker symbol is TNH.  TNCLP is the sole limited partner of Terra Nitrogen, Limited Partnership (TNLP), owner of the Verdigris, Oklahoma manufacturing facility and related assets. Terra Nitrogen GP Inc., an indirect, wholly-owned subsidiary of CF Industries Holdings, Inc., is the General Partner of TNCLP and exercises full control over all of TNCLP’s business affairs.

TNCLP has the capacity to produce annually 1.9 million tons (32% nitrogen basis) of urea ammonium nitrate solutions (UAN) and 1.1 million tons of ammonia, the basic ingredient for most nitrogen fertilizer and many industrial products.

Sales per share. Terra Nitrogen’s sales for trailing 12 months ended December 31st, 2010 were $564,600,000.  At the end of 4Q 2010 there were 18,501,576 common units (shares) outstanding.  By dividing $564,600,000 by 18,501,576, we get sales per share of $30.52.

Earnings per share. Terra Nitrogen’s earnings per share of $10.90 for the trailing 12 months were calculated by dividing net income (income statement) by outstanding shares (balance sheet).  They earned $201,600,000 over the last 12 months.

Dividends per share. By dividing $148,200,000 in dividends paid in the last 12 months by 18,501,576 common units (shares) outstanding, we find that Terra Nitrogen had dividends per share for the last 12 months of $8.01.

Cash flow per share. The cash flow per share of $11.53 for the last 12 months was calculated by taking net income of $201,600,000 and adding back in the depreciation of $11,810,000 (estimated as 11.4% of long-term assets; same as 3Q2010 quarterly SEC filing) on their income statement, which has no impact on cash flow (income statement), and then dividing by the 18,501,576 shares outstanding (balance sheet).

Dividend yield. Terra Nitrogen’s stock had a dividend yield on December 31st, 2010, of 7.4 percent.  The dividend yield is calculated by dividing the dividend per share of $8.01 per share at the close of 2010 by the stock price of $108.11.  The stock is currently yielding 4.4% ($1.36 quarterly dividend / $122.51 stock price).

Now let’s begin our analysis of the ability of Terra Nitrogen to meet its maturing loan obligations and current cash flow needs by computing its liquidity and debt coverage ratios.

Quick ratio

The quick ratio is an important liquidity ratio that is computed by removing inventory from current assets and then dividing by the remainder by current liabilities.  This information can be found on Safe Bulkers’ balance sheet.  Since inventories are typically the least liquid of a company’s current assets and are likely to produce a loss if liquidated, it is prudent to look at the firm’s ability to cover short-term liabilities without relying on them.  The rule of thumb is that a company with a quick ratio over 1 or better indicates that it could cover all current liabilities with the liquid assets it has on hand, thereby reducing any need to cut its dividend.

Terra Nitrogen’s quick ratio for the last 12 months is 1.92, more than the standard rule of thumb that you would like to see.  The higher the ratio, the better we like the company.

Calculation: $193,100,000 current assets in 2010 minus $27,600,000 inventory divided by $86,300,000 in current liabilities in 2010.

Debt coverage ratio

The short-term debt coverage ratio allows you to quickly see if the company’s short-term debt obligations can easily be paid by using the cash that is being generated from company operations.  This ratio is calculated by dividing income from operations by current liabilities or short-term debt (balance sheet).  This ratio should equal at least 2.0.

Terra Nitrogen’s short-term debt coverage ratio equals 2.34 for the last 12 months.  This means that the company is generating more than twice the cash flow it needs from operations to pay off all of its short-term obligations.  Taken by itself, this ratio would indicate that the dividend is pretty secure and would also indicate that there is sufficient operating income to offset a slightly lower liquidity position if that were indicated by the company’s quick ratio.

Valuation ratios

There are two important ratios that can help you identify companies with good value characteristics.

Price-to-sales ratio. We rank companies with low price-to-sales ratios higher than those companies whose stock is pricey relative to the sales being generated.  You can calculate the ratio by dividing the stock price at the end of 4Q2010 ($108.11) by sales per share ($30.52).  Terra Nitrogen’s price-to-sales ratio for the last twelve months is 3.54, which is not better than our 2.00 rule of thumb ratio that we use to indicate good value.

Price-to-earnings ratio (P/E). Also known as the price-to-earnings multiple, this ratio tells you how expensive the stock is from a price standpoint given earnings that the stock is generating.  Historically, stocks are a good value when the ratio or multiple is below 10, but we consider stocks that have a P/E of less than 12 – the lower the ratio the better.  You can calculate the ratio by dividing the stock’s price by the earnings per share being generated.  Terra Nitrogen’s price-to-earnings ratio for the last 12 months was is 9.91 ($108.11 stock price divided by $10.90 per share).  It is slightly higher today at 11.23.

Dividend ratios

Dividend coverage ratio. This ratio shows how secure the dividend is based on the cash flow being generated by the company.  Instead of applying the cash flow to analyze whether the company can meet its debt obligations, we analyze this ratio to assess how easily the company can keep making its dividend payments.  To calculate this ratio, you divide cash flow per share ($11.53) by dividend per share ($8.01).  The higher the dividend coverage from cash flow, the better we like it.

Terra Nitrogen has a dividend coverage ratio of 144 percent.

Dividend payout ratio.
This ratio tells you how much profit the company is paying out to shareholders in dividends.  Once again, the higher the better, so long as the ratio does not exceed 100 percent.  Since a company can only pay dividends from current or retained earnings, it is a warning sign if a company is paying dividends that exceed current earnings.

Terra Nitrogen’s dividend payout ratio is 73.4 percent and is calculated by dividing its dividend per share ($8.01) by earnings per share ($10.90).  We tend to look for companies that have payout ratios of at least 50 percent, which to us indicates that company is committed to rewarding shareholders through dividend payouts.

Growth ratios

One-year revenue growth ratio.  This ratio measures the one-year percentage change in revenue growth.  It is calculated by subtracting last year’s revenue ($507.7 million) from the current year’s revenue ($564.6 million) to find the difference ($56.9 million), and then dividing that difference ($56.9 million) by last year’s revenue ($507.7 million) to find the percentage change.  Terra Nitrogen’s revenue growth rate for 2010 is 11.2 percent indicating that revenue has improved by slightly more than our 10 percent rule of thumb.

One-year earnings growth ratio.  This ratio measures the one-year percentage change in earnings growth.  It is calculated by subtracting last year’s earnings ($144.3 million) from the current year’s earnings ($201.6 million) to find the difference ($57.3 million), and then dividing that difference ($57.3 million) by last year’s earnings ($144.3 million) to find the percentage change.  Terra Nitrogen’s earnings growth rate was 39.7 percent in 2010, which is several times greater than our 10 percent rule of thumb for earnings growth rate.  With both revenue and profits rising, Terra Nitrogen’s stock price should reflect this positive trend and move higher.

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Published in: on February 17, 2011 at 9:11 pm  Leave a Comment  

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