Terra Nitrogen's Dividend X-ray

Not all dividends are created equal. Here, we'll do a top-to-bottom analysis of a given company to understand the quality of its dividend and how that's changed over the past five years.

The company we're looking at today is Terra Nitrogen (NYS: TNH) , which yields 10%.

Terra Nitrogen produces nitrogen fertilizer products. The company -- along with fellow fertilizer companies CVR Partners (NYS: UAN) , Agrium (NYS: AGU) , and Rentech Nitrogen Partners (NYS: RNF) -- has been reporting huge revenue jumps as prices of nitrogen products have surged. Nitrogen fertilizer stocks have been on a tear the past few years as fertilizer demand continues to grow (CVR Partners only IPO'd in April, and Rentech Nitrogen Partners was spun off from parent company Rentech (ASE: RTK) last week).

Terra Nitrogen Total Return Price Chart
Terra Nitrogen Total Return Price Chart

Terra Nitrogen Total Return Price Chart by YCharts.

To evaluate the quality of a dividend, the first thing to consider is whether the company has paid a dividend consistently over the past five years, and, if so, how much has it grown.

Terra Nitrogen Dividend Chart
Terra Nitrogen Dividend Chart

Terra Nitrogen Dividend Chart by YCharts.

Terra's dividend has been volatile. With the price of nitrogen skyrocketing, Terra has been able to return huge amounts of cash to shareholders, driving up its stock price.

Immediate safety
To understand how safe a dividend is, we use three crucial tools, the first of which is:

  • The interest coverage ratio, or the number of times interest is earned, which is calculated by earnings before interest and taxes, divided by interest expense. The interest coverage ratio measures a company's ability to pay the interest on its debt. A ratio less than 1.5 is questionable; a number less than 1 means the company is not bringing in enough money to cover its interest expenses.

Terra has no debt and, as such, has no interest to cover.

The other tools we use to evaluate the safety of a dividend are:

  • The EPS payout ratio, or dividends per share divided by earnings per share. The EPS payout ratio measures the percentage of earnings that go toward paying the dividend. A ratio greater than 80% is worrisome.

  • The FCF payout ratio, or dividends per share divided by free cash flow per share. Earnings alone don't always paint a complete picture of a business's health. The FCF payout ratio measures the percent of free cash flow devoted toward paying the dividend. Again, a ratio greater than 80% could be a red flag.


Source: S&P Capital IQ.

Terra's payout ratio has been as volatile as its dividends; however, over the past two years, the payout ratio has been moving steadily down from a high of 120% at the end of 2009 to a high between 40% and 60% this year.



Source: S&P Capital IQ.

There are some alternative yields in the industry, though none look as appealing as Terra Nitrogen's. Mosaic (NYS: MOS) is at the bottom of the pile, with a 0.4% trailing yield and a 8.4% payout ratio. PotashCorp (NYS: POT) is next, with a trailing yield of 0.7% and a 14.3% payout raio. Not to be left out, CF Industries sports a 1.1% yield and a 2.2% payout ratio.

Another tool for better investing
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