Dear Mr. Berko: I told my broker at Wells Fargo that I wanted to take a gamble with $5,000, and he recommended that I buy 400 shares of CVR Partners at $12. At the time, the issue paid $1.56 and yielded 13 percent. So I bought 400 shares, and my greedy side wants me to buy another 400 shares. Please tell me what you know and think about this company and (I can afford the risk) whether I should invest another $5,000.
- JK, Akron, Ohio
Dear JK: CVR Partners is not an investment; it's a speculation - a highly mephitic and terribly rank speculation. But it's worthy of consideration for a patient investor who is comfortable owning a distressed stock that is ignored by analysts on Wall Street, does not have institutional support and could drop to $7 in the next 12 months if oil prices remain low. Frankly, I wonder whether you're really using a Wells Fargo adviser, because those guys mechanically recommend high-commission annuity products. And cheese and crackers got all muddy, they certainly peddle a lot of that stuff.
CVR Partners, abbreviated as UAN on the New York Stock Exchange, now trades at $10.60. Its initial public offering came in April 2011, just as the Dow Jones industrial average began breaking the 11,000 level, at $16.50 a share and then, nine months later, rose to $31 on revenues of $302 million and paid a dandy $2.21 tax-deferred dividend. It's a limited partnership that's in the business of making and marketing nitrogen fertilizers. The company has state-of-the-art facilities in Coffeyville, Kansas, a bucolic town spread out along the banks of the Verdigris River. Coffeyville has a population of 10,213 and may not be a very exciting place to be on a Saturday night.
CVR Partners produces ammonia and UAN, which is the most commonly used fertilizer in the world. UAN, a solution of urea and ammonium nitrate in water, is a fertilizer that can be applied much more uniformly than nonliquid fertilizers and can easily and efficiently be mixed with herbicides, pesticides and other crop nutrients. This allows a farmer to reduce his time and costs by applying several materials simultaneously rather than making separate applications. CVR Partners' nitrogen fertilizer plant is the only facility in North America with a gasification process that uses petroleum coke to produce hydrogen, the key ingredient in the manufacturing process of UAN. And CVR Partners, with only 144 employees, produces a tick over 5 percent of the UAN supply in the U.S.
The $2.21 dividend, which was reduced to $1.75 in 2013 and reduced again to $1.41 in 2014, has been raised twice this year. In fact, the most recent quarterly dividend, which was 39 cents, can be annualized at $1.56, which is why CVR Partners' stock has a current 14.6 percent yield. The company's facilities are running at a high utilization rate; the average price for UAN is $265 a ton, up more than 4 percent from last year, and ammonia, which averaged $553 a ton last year, is up 16 percent. The consensus suggests continued high demand for nitrogen fertilizers, with modest price increases in the next few years. Some on the Street believe that earnings for 2016 will be up 25 percent from 2015 because of an increase in revenues, higher net profit margins and increased fertilizer prices. Some on the Street who follow CVR Partners believe that management could raise the dividend to $2 next year and perhaps higher in subsequent years. Therefore, with the shares trading at 35 percent of its IPO price during the past year, a rise to the high teens is not an unreasonable prediction for the coming 2 1/2 years.
Because I'm told the dividend is relatively safe and because I believe that management will raise the dividend again this year and next, I'd be comfortable speculating with another 400 shares. And of course, I like the fact that the dividend of this limited partnership is not taxable. However, your cost basis is reduced each quarter by the amount of distribution you receive. Therefore, if you buy CVR Partners at $10.60 and during the year it pays a $160 distribution, your cost basis will fall to $9. And if it pays $190 in 2016, your cost basis will be lowered to $5.50.
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at mjberko@yahoo.com. To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.
© 2015 Creators.com
Published: Thu, Sep 03, 2015
