Will Terra Nitrogen's Good Run Continue?

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Terra Nitrogen's (NYS: TNH) solid third-quarter numbers didn't really come as a surprise as the company was poised to make the most of the agriculture boom and shooting crop prices.

While things continue to look good for Terra, there's something important related to the dividend it yields that you might want to keep in mind. Read along to know what it is.

Fertile numbers
Terra couldn't have been happier! Strong global market conditions have, to a great extent, pushed up the prices of nitrogen -the principal fertilizer Terra deals in. Prices of ammonia and urea ammonium nitrate (UAN) exploded, rising 24% and 63%, respectively, year-on-year. So, you can well imagine how heavy Terra's money bag must have become!

Terra also raised production in the last quarter resulting in higher sales volumes. This perfect blend of higher prices and volumes led to a surge in Terra's net sales to $203.3 million, compared to $136.0 million in the year-ago quarter.

Such favorable market conditions and resultant high prices were also the primary factors behind peers CVR Partners' (NYS: UAN) astounding 66.4% jump in its third-quarter revenues, and Mosaic's (NYS: MOS) solid 41% top-line growth in its first quarter. Not just that, potash king PotashCorp's (NYS: POT) nitrogen segment third-quarter sales also shot up by around 48% in spite of flat volumes as prices of nitrogen products surged. Even Agrium's (NYS: AGU) second-quarter revenues had surged 40% from the year-ago period as nutrient prices, especially nitrogen, rose.

Not surprisingly, solid top-line growth nicely drove up Terra's net income to $128.4 million from $35.2 million last year.

In Terra's favor
Rising crop prices and the global agriculture boom have been big revenue drivers for fertilizer players like Terra. Flush from high prices, farmers are growing more, which directly translates into higher demand for nutrients. What's even more significant is corn, which requires a lot of nutrients, and whose prices have been very high lately.

Last month, fertilizer stocks felt the pinch when USDA reported higher corn stockpiles, giving rise to fears of lower-than-expected corn plantations. But, if corn supply goes up and prices fall, consider this. Wouldn't cheaper prices fuel demand for the essential corn, again pushing its prices up the ladder? It's a cycle that's likely to persist, and should ultimately bode well for Terra.

Also, fertilizer giant CF Industries (NYS: CF) has projected more than 93 million acres of corn to be planted next spring, and is looking forward to near-record plantations. Even if anything near to this holds good, happy times should continue for Terra. Moreover, with countries like China gobbling up corn, a tight market for the crop is likely to persist.

Other factors like India stepping in as a big purchaser of chemicals such as urea and potash also indicate the strong demand for these products.

The Foolish bottom line
Terra stands out among its peers because of its awesome 8.5% dividend yield. Can Terra maintain such high yields? Yes, it can. Since Terra is structured in the form of a master limited partnership, it can pass on any taxable income directly to their shareholders instead of paying income tax.

But, here's what Fools should note. Terra expects huge capital expenditures between $50 million and $80 million in 2012 owing to a delayed project. Now, this will mean lower cash in the hands of the company to distribute to shareholders (read: lower dividends).

Otherwise, things look well placed for Terra, making it a stock worth watching.

I'm sure you would like to know what Terra's project plans are, and how they could affect your returns. Keep yourself updated on all this and more by adding Terra to your stock watchlist. It's a free, personalized stock-tracking service brought to you by Motley Fool.

At the time this article was published Neha Chamaria does not own shares of any of the companies mentioned in this article. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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