To offset lower urea prices, CF focused on selling higher amounts of ammonia, the prices of which had risen nearly 11% year over year. So while CF maintained its urea sales volumes at last year’s level, it increased ammonia sales by 5% during the quarter.
Likewise, CF kept the proportion of UAN in its total sales mix steady at 45% to exploit the firm prices of UAN. In fact, CF increased the production of UAN by 5%, year over year, during the second quarter even as production volumes for all other nitrogen products declined year over year. That’s because UAN generates high margins, and has thus captured CF’s attention.
High UAN profitability even encouraged peer CVR Partners LP (NYSE:UAN) to convert a whopping 97.5% of the ammonia it produced to UAN during its last quarter. The strategy worked, reflecting as an 8% year-over-year growth in the company’s top line.
So every time CF’s management talks excitedly about UAN, investors should know where that’s coming from. The company’s flexibility to adjust production helps it negate price shocks to a great extent, which, undoubtedly, is a huge advantage.
Ready to count your checks?
Operational metrics aside, perhaps the most important takeaway from CF Industries Holdings, Inc. (NYSE:CF)’s second-quarter earnings call for investors was the company’s views on generating value for shareholders.
CF’s management is weighing what would be the best option to return cash to the company’s shareholders. In all probability, it means greater dividends could be on the way. Until now, CF advocated share buybacks, returning an impressive $1.1 billion in repurchases year to date.
Meanwhile, CF has been stingy with dividends, paying out just 5% of its profits. At current share prices, CF yields a dismal 0.80% dividend yield. Compare that with PotashCorp’s handsome 4.8% dividend yield, or with Mosaic’s and Agrium’s similar yields of 2.4%, and CF turns out to be the worst option for investors looking for some secure income. That might change soon, and investors should keep an eye.
Foolish takeaway
The price of natural gas is an uncontrollable, as well as an unpredictable, factor. While CF Industries Holdings, Inc. (NYSE:CF)can’t do much about it, the company’s business model is strong enough to fuel excellent growth should gas prices weaken. I think it’s time for investors who have sidelined CF Industries’ stock to rethink their decision.
The article 3 Solid Reasons That Natural Gas Fears Shouldn’t Keep You Away From This Stock originally appeared on Fool.com and is written by Neha Chamaria.
Fool contributor Neha Chamaria has no position in any stocks mentioned. The Motley Fool owns shares of CF Industries Holdings.
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