TMFDeej (99.47)

A spinoff with a 9% yield in 2013

December 31, 2012 – Comments (2) | RELATED TICKERS: UAN , CVI

I have been a big fan of CVR Partners (UAN), the fertilizer spinoff of the refiner CVR Energy (CVI) since the very beginning. I am up 57% on it in CAPS versus a gain of only 5% for the S&P 500 over the same time period, and I still believe that the company is significantly undervalued.

What's not to like about a spun-off fertilizer company that pays a large dividend in an area of increased food prices and consumption and low interest rates?

One thing that I have been waiting for is UAN's planned capacity expansion to come on-line. The company is expanding its ability to produce fertilizer by 50%. This new capacity is finally scheduled to become operational in early 2013. Combine this increased production with the fact that UAN will not perform its annual turnaround maintenance for its plant in 2013 because it already performed it late this year and we're looking at a company in a great sector that will have a yield in 2013 of around 9%. Nice.

One thing that I'd like to see is for UAN to acquire another plant at some point down the road to increase its production capacity and reduce the inherent danger that comes with having only one facility in the dangerous fertilizer production business. One explosion or similar issue would likely cause big problems for UAN. Perhaps now that most of the spending that has been associated with the company's capacity expansion at its current plant has been paid out the company can look to use its excess funds to be an acquirer. 

Another thing that would benefit the company would be higher natural gas prices. UAN uses the byproducts from petroleum refining to produce its fertilizer instead of natural gas like most of its competitors use. This would provide it with a significant cost advantage should nat gas prices rise in the future. That's not something that I am counting on happening, but it's a nice embedded free call option.

I personally see UAN as having 10% to 15% upside minimum from its likely dividend increase in 2013 alone. Add this to a 9% dividend and you're looking at some excellent annual returns. Any additional tailwinds from increased fertilizer prices in a world that will likely demand more in the future, higher natural gas prices or even an acquisition would be icing on the cake.

Here's a good Seeking Alpha article on the company that I just came across for anyone who's interested:

This Undervalued High Dividend Stock Should Pop In 2013

Thanks for reading everyone.  

Happy New Year!

Deej